[Federal Register Volume 89, Number 205 (Wednesday, October 23, 2024)]
[Rules and Regulations]
[Pages 84732-84763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-23857]
[[Page 84731]]
Vol. 89
Wednesday,
No. 205
October 23, 2024
Part III
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 1
Advanced Manufacturing Investment Credit Rules Under Sections 48D and
50; Final Rule
Federal Register / Vol. 89 , No. 205 / Wednesday, October 23, 2024 /
Rules and Regulations
[[Page 84732]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 10009]
RIN 1545-BQ54
Advanced Manufacturing Investment Credit Rules Under Sections 48D
and 50
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final rule.
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SUMMARY: This document contains final regulations to implement the
advanced manufacturing investment credit established by the CHIPS Act
of 2022 to incentivize the manufacture of semiconductors and
semiconductor manufacturing equipment within the United States. The
final regulations adopt with certain modifications rules proposed in
the first of two notices of proposed rulemaking to implement the
credit, other than proposed rules regarding the elective payment
election that were addressed in the final rule adopted in connection
with the second notice of proposed rulemaking. The final regulations
provide the eligibility requirements for the credit, and a special 10-
year credit recapture rule that applies if there is a significant
transaction involving the material expansion of semiconductor
manufacturing capacity in a foreign country of concern. The final
regulations affect taxpayers that claim the advanced manufacturing
investment credit.
DATES:
Effective date: These regulations are effective on December 23,
2024.
Applicability dates: For dates of applicability see Sec. Sec.
1.48D-1(d), 1.48D-2(q), 1.48D-3(h), 1.48D-4(d), 1.48D-5(f) and 1.50-
2(e).
FOR FURTHER INFORMATION CONTACT: Concerning these final regulations,
contact Lani Sinfield of the Office of Associate Chief Counsel
(Passthroughs and Special Industries), (202) 317-4137 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Authority
This document amends the Income Tax Regulations (26 CFR part 1) by
adding regulations authorized to be issued by the Secretary of the
Treasury or her delegate (Secretary) under sections 50(a) and 7805(a)
of the Internal Revenue Code (Code) regarding the application of
sections 48D and 50(a)(3) and (a)(6)(D) and (E) of the Code (final
regulations).
Section 50(a)(3)(C) provides an express delegation of authority to
the Secretary to provide guidance relating to the recapture requirement
in section 50(a)(3) for the advanced manufacturing investment credit,
stating, ``The Secretary shall issue such regulations or other guidance
as the Secretary determines necessary or appropriate to carry out the
purposes of this paragraph, including regulations or other guidance
which provide for requirements for recordkeeping or information
reporting for purposes of administering the requirements of this
paragraph.''
In addition, section 50(a)(6)(D)(i) provides an express delegation
of authority to the Secretary to determine, in coordination with the
Secretary of Commerce and the Secretary of Defense, significant
transactions, stating, ``[t]he term `applicable transaction' means,
with respect to any applicable taxpayer, any significant transaction
(as determined by the Secretary, in coordination with the Secretary of
Commerce and the Secretary of Defense) involving the material expansion
of semiconductor manufacturing capacity of such applicable taxpayer in
the People's Republic of China or a foreign country of concern (as
defined in section 9901(7) of the William M. (Mac) Thornberry National
Defense Authorization Act for Fiscal Year 2021).''
The final regulations are also issued under the express delegation
of authority under section 7805(a), which provides that ``[t]he
Secretary shall prescribe all needful rules and regulations for the
enforcement of [the Code], including all rules and regulations as may
be necessary by reason of any alteration of law in relation to internal
revenue.''
Background
I. Overview
Section 107(a) of the CHIPS Act of 2022 (CHIPS Act), enacted as
Division A of Public Law 117-167, 136 Stat. 1366, 1393 (August 9,
2022), added section 48D to the Code to establish the advanced
manufacturing investment credit (section 48D credit) as an investment
credit for purposes of section 46 of the Code, which is a current year
general business credit under section 38 of the Code.
Section 48D(a) provides that the section 48D credit is an amount
equal to 25 percent of the qualified investment for any taxable year
with respect to any advanced manufacturing facility of an eligible
taxpayer. Section 48D(b)(1) provides that the ``qualified investment''
with respect to any advanced manufacturing facility for any taxable
year is the basis of any qualified property placed in service by the
taxpayer during such taxable year which is part of an advanced
manufacturing facility. However, the section 48D credit only applies to
property placed in service after December 31, 2022, and, for any
property the construction of which begins prior to January 1, 2023,
only to the extent of the basis thereof attributable to the
construction, reconstruction, or erection after August 9, 2022 (the
date of enactment of the CHIPS Act). See section 107(f)(1) of the CHIPS
Act. In addition, the section 48D credit does not apply to property the
construction of which begins after December 31, 2026. See section
48D(e).
Section 48D(b)(2) provides that, for purposes of section 48D(b),
the term ``qualified property'' means tangible property with respect to
which depreciation (or amortization in lieu of depreciation) is
allowable that is integral to the operation of the advanced
manufacturing facility if (I) constructed, reconstructed, or erected by
the taxpayer, or (II) acquired by the taxpayer, if the original use of
such property commences with the taxpayer. Qualified property includes
any building or its structural components satisfying such requirements
unless the building or portion of the building is used for offices,
administrative services, or other functions unrelated to manufacturing.
Section 48D(b)(3) provides that the term ``advanced manufacturing
facility'' means a facility for which the primary purpose is the
manufacturing of semiconductors or semiconductor manufacturing
equipment.
Section 48D(b)(4) provides that the qualified investment with
respect to any advanced manufacturing facility for any taxable year
shall not include the portion of the basis of any such property that is
attributable to qualified rehabilitation expenditures (as defined in
section 47(c)(2) of the Code).
Section 48D(b)(5) states that rules similar to the rules of
subsections (c)(4) and (d) of section 46 (as in effect on the day
before the date of the enactment of the Revenue Reconciliation Act of
1990) shall apply for purposes of section 48D(a).
Section 48D(c) provides that, for purposes of the section 48D
credit, an ``eligible taxpayer'' is any taxpayer that (1) is not a
foreign entity of concern (as defined in section 9901(6) of the William
M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year
2021, as amended by section 103
[[Page 84733]]
of the CHIPS Act), and (2) has not made an applicable transaction (as
defined in section 50(a) of the Code) during the taxable year.
Section 107(b) of the CHIPS Act added new section 50(a)(3), (6)(D)
and (E) to the Code to provide special recapture rules for certain
expansions in connection with advanced manufacturing facilities. Under
section 50(a)(3)(A), if there is an applicable transaction by an
applicable taxpayer before the close of the 10-year period beginning on
the date such taxpayer placed in service property that is eligible for
the section 48D credit, then the taxpayer's Federal income tax
liability under chapter 1 of the Code (chapter 1) for the taxable year
in which such transaction occurs must be increased by 100 percent of
the aggregate decrease in the credits allowed under section 38 for all
prior taxable years which would have resulted solely from reducing to
zero any investment credit determined under section 46 that is
attributable to the section 48D credit with respect to such property
(applicable transaction recapture rule). Section 50(a)(3)(B) provides
an exception to the applicable transaction recapture rule for an
applicable taxpayer that demonstrates to the satisfaction of the
Secretary that the applicable transaction has been ceased or abandoned
within 45 days of a determination and notice by the Secretary. Section
50(a)(3)(C) authorizes the Secretary to issue such regulations or other
guidance as the Secretary determines necessary or appropriate to carry
out the purposes of the applicable transaction recapture rule,
including regulations or other guidance providing for recordkeeping
requirements or information reporting for purposes of administering the
requirements of section 50(a)(3).
As added to the Code by section 107(b)(2) of the CHIPS Act, section
50(a)(6)(D) provides that for purposes of section 50(a), the term
``applicable transaction'' means, with respect to any applicable
taxpayer, any significant transaction (as determined by the Secretary,
in coordination with the Secretary of Commerce and the Secretary of
Defense) involving the material expansion of semiconductor
manufacturing capacity of such applicable taxpayer in a foreign country
of concern (as defined in section 9901(6) of the William M. (Mac)
Thornberry National Defense Authorization Act for Fiscal Year 2021, as
amended by section 103 of the CHIPS Act) other than certain
transactions that primarily involve the expansion of manufacturing
capacity for legacy semiconductors (as defined in section 9902(a)(6) of
the William M. (Mac) Thornberry National Defense Authorization Act for
Fiscal Year 2021, as amended by section 103 of the CHIPS Act).
Section 50(a)(6)(E) defines an ``applicable taxpayer'' for purposes
of section 50(a) as any taxpayer who has been allowed a section 48D
credit for any prior taxable year.
II. Proposed and Temporary Regulations
On March 23, 2023, the Department of the Treasury (Treasury
Department) and the IRS published proposed regulations (REG-120653-22)
in the Federal Register (88 FR 17451) related to the section 48D credit
under the authority granted by sections 48D(d), 50(a), and 7805(a)
(March 2023 proposed regulations). The March 2023 proposed regulations
primarily would apply long-established credit mechanics and procedures
common to all investment tax credits (including the section 48D credit)
previously set forth in regulations and subregulatory guidance. In
addition, the March 2023 proposed regulations included proposed
definitions and rules that would apply for determining who is an
eligible taxpayer, what qualifies as qualified property or an advanced
manufacturing facility, whether the beginning of construction
requirement is met, and what qualifies as a significant transaction
involving a material expansion of semiconductor manufacturing capacity
in a foreign country of concern for purposes of the special 10-year
recapture rule under section 50(a)(3). Consistent with the statutory
directive in section 50(a)(6)(D)(i) to coordinate with the Department
of Commerce and the Department of Defense regarding such significant
transactions, the Treasury Department and the IRS, in coordination with
the Department of Commerce and the Department of Defense, incorporated
in the March 2023 proposed regulations definitional concepts set forth
in proposed 15 CFR part 231 as contained in the proposed rule,
Preventing the Improper Use of CHIPS Act Funding, published in the
Federal Register (88 FR 17439) by the CHIPS Program Office, National
Institute of Standards and Technology, Department of Commerce (Commerce
Proposed Rule). The Commerce Proposed Rule would have provided
guardrails to prevent the improper use of CHIPS Act funding overseen by
the Department of Commerce. On September 25, 2023, the CHIPS Program
Office, National Institute of Standards and Technology, Department of
Commerce published the final rule, Preventing the Improper Use of CHIPS
Act Funding, in the Federal Register (88 FR 65600) to add part 231,
subchapter C, to 15 CFR chapter II (Commerce Final Rule).
In addition, Sec. 1.48D-6 of the March 2023 proposed regulations
set forth the general requirements that would apply for making an
elective payment election under section 48D(d), and the general
requirement that an eligible taxpayer, partnership, or S corporation
would need to comply with the registration procedures in proposed Sec.
1.48D-6(c)(2) as a condition of, and prior to, any amount being treated
as a payment under section 48D(d)(1) or (d)(2)(A)(i)(I). However, the
March 2023 proposed regulations under proposed Sec. 1.48D-6(c)(2)
reserved on the procedures and additional information required for
completing the pre-filing registration process.
On June 21, 2023, the Treasury Department and the IRS published
proposed regulations (REG-105595-23) in the Federal Register (88 FR
40123) authorized by section 48D(d)(6) to update proposed Sec. 1.48D-6
of the March 2023 proposed regulations (June 2023 proposed
regulations). Also on June 21, 2023, the Treasury Department and the
IRS published temporary regulations (TD 9975) in the Federal Register
(88 FR 40086) authorized by section 48D(d)(6) under Sec. 1.48D-6T to
set forth mandatory information and registration requirements for
taxpayers planning to make an elective payment election under section
48D(d) to treat the amount of the section 48D credit as a payment of
Federal income tax, or in the case of a partnership or S corporation,
to receive a payment in the amount of such credit. The temporary
regulations are applicable to property placed in service on or after
December 31, 2022, and during a taxable year ending on or after June
21, 2023, and will expire on June 12, 2026. A public hearing on the
June 2023 proposed regulations was held on August 24, 2023. On March
11, 2024, the Treasury Department and the IRS published final
regulations (TD 9989) in the Federal Register (89 FR 17596) authorized
by section 48D(d)(6) under Sec. 1.48D-6 to remove the temporary
regulations (TD 9975) and adopt the June 2023 proposed regulations with
modifications in response to all comments received on the proposed
rules and all testimony heard at the public hearings held on July 26,
2023 (March 2023 proposed regulations) and August 24, 2023 (June 2023
proposed regulations) (March 2024 final regulations).
The Treasury Department and the IRS received more than 40 comments
responding to the March 2023 proposed
[[Page 84734]]
regulations. A public hearing on the March 2023 proposed regulations
was held on July 26, 2023. As described in the following Summary of
Comments and Explanation of Revisions, this Treasury decision adopts
Sec. Sec. 1.48D-1 through 1.48D-5 and 1.50-2 of the March 2023
proposed regulations with certain modifications after full
consideration of all comments received on those proposed rules and all
testimony heard at the July 26, 2023, public hearing.
Summary of Comments and Explanation of Revisions
I. Overview
The final regulations set forth in Sec. Sec. 1.48D-1 through
1.48D-5 and 1.50-2 retain the basic approach and structure of the March
2023 proposed regulations, with certain revisions in response to
comments submitted by commenters in response to the March 2023 proposed
regulations.
The Treasury Department and the IRS have refined and clarified
certain aspects of the proposed regulations in these final regulations.
Specifically, the definitions of ``semiconductor manufacturing,''
``semiconductor manufacturing equipment,'' and ``significant
transaction'' have been clarified. The final regulations do not set
forth rules for Sec. 1.48D-6 of the March 2023 proposed regulations,
because the June 2023 proposed regulations updated Sec. 1.48D-6 of the
March 2023 proposed regulations and the June 2023 proposed regulations
were finalized by the March 2024 final regulations. Consistent with the
proposed regulations, the final regulations primarily apply long-
established credit mechanics and procedures common to all investment
tax credits (including the section 48D credit) previously set forth in
regulations and subregulatory guidance. In addition, consistent with
the statutory directive in section 50(a)(6)(D)(i) to coordinate with
the Department of Commerce and the Department of Defense regarding the
scope of significant transactions that are applicable transactions, the
Treasury Department and the IRS, in coordination with the Department of
Commerce and the Department of Defense, have incorporated in the final
regulations definitional concepts, as determined by the Secretary of
Commerce in the Commerce Final Rule in 15 CFR part 231, necessary to
align the final regulations related to applicable transactions that
result in the recapture of the section 48D credit with the provisions
of the Commerce Final Rule.
II. Comments on and Changes to Proposed Sec. 1.48D-1
Commenters requested that the final regulations address whether the
taxpayer in proposed Sec. 1.48D-1(c)(2) actually claims a
rehabilitation credit. Proposed Sec. 1.48D-1(c)(2) includes an example
(proposed example) in which a taxpayer incurred capital expenditures to
reconstruct a building. The proposed example indicates that all of the
expenditures are ``qualified investment'' for purposes of the section
48D credit and a portion of those expenditures are also qualified
rehabilitation expenditures (QREs) (as defined in section 47(c)(2) and
Sec. 1.48-12(c)) for purposes of the rehabilitation credit. The
proposed example concludes that the amount of the taxpayer's qualified
investment does not include the portion of the basis of the property
that is attributable to any QREs.
Section 48D(b)(4) and proposed Sec. 1.48D-1(c)(1) provide that
qualified investment with respect to any advanced manufacturing
facility for any taxable year does not include the portion of the basis
of the property that is attributable to QREs. The Treasury Department
and the IRS have determined that it would be inconsistent with section
48D(b)(4) to exclude from qualified basis the portion of the basis that
is attributable to QREs only when a taxpayer actually claims a
rehabilitation credit. Accordingly, the final regulations modify the
proposed example to clarify that qualified investment does not include
the basis of the property that is attributable to QREs even if the
taxpayer does not determine a rehabilitation credit.
Commenters requested that the final regulations clarify whether the
section 48D credit has an impact on any other credits established by
the Code. The Treasury Department and the IRS note that section
48D(b)(4) provides a special rule for coordination with the
rehabilitation credit but does not provide any special rules to
coordinate section 48D with other credits established by the Code.
Additionally, the Code includes numerous tax credits. Addressing the
impact of the section 48D credit on every other credit established by
the Code (if any) would require a careful examination of numerous
provisions apart from those found in section 48D and the section 48D
regulations. For these reasons, addressing whether the section 48D
credit has an impact on other credits established by the Code is not
necessary for purposes of the final regulations.
III. Comments on and Changes to Proposed Sec. 1.48D-2
A. Basis
Commenters requested clarification on the proper method for
determining the portion of basis attributable to the construction,
reconstruction, or erection after the date of enactment (August 9,
2022) for property the construction of which began prior to the
effective date (January 1, 2023) of section 107 of the CHIPS Act. The
commenters requested that the final regulations provide some
flexibility to address the difficulties associated with tracking and
allocating costs around a date occurring in the middle of the month
(August 9, 2022). The commenters also requested that the final
regulations allow for the use of any reasonable method and specifically
provide that rules similar to the cost allocation rules in Sec. Sec.
1.48-2(b)(2), 1.48-11(b)(5)(i), and 1.48-12(c)(1) are applicable. One
commenter requested that the final regulations clarify that basis can
be determined on the principles of section 461 of the Code. The
commenter argued that this would clarify, for example, that in cases
where a taxpayer has made a payment for construction services prior to
August 10, 2022, such payment will be included in the basis of
qualified property because the amount is incurred only when the service
is performed.
For the avoidance of doubt, no provision of Federal law, including
the CHIPS Act or the Code, permits determining any amount of a section
48D credit with respect to any basis in property attributable to
construction, reconstruction, or erection that occurred before August
10, 2022 (the first day after the August 9, 2022, date of enactment of
the CHIPS Act). However, a rule to address the proper method for
allocating basis attributable to the period beginning on the day after
the date of enactment (August 10, 2022) and ending on the day
immediately before the effective date of section 48D (December 31,
2022) is consistent with the purpose and structure of the statute.
Accordingly, the final regulations clarify that for property the
construction of which began before January 1, 2023, the portion of
basis of such property attributable to construction, reconstruction, or
erection after August 9, 2022, the date of enactment of the CHIPS Act,
(if any) must be allocated using any reasonable method, including by
applying the principles of section 461. The final regulations further
clarify that rules similar to the rules in Sec. Sec. 1.48-2(b)(2),
1.48-11(b)(5)(i), and 1.48-12(c)(1) apply.
[[Page 84735]]
Commenters requested that the final regulations provide methods for
allocating basis for dual-use property or property comprised of
eligible and non-eligible components by square footage, cost, or allow
the taxpayer to utilize any reasonable method for allocating cost among
properties and time periods. Two commenters requested that the final
regulations provide a percentage-based safe harbor rule that allows 100
percent of the basis to qualify if, for example, 80 or 90 percent of
the basis is allocable to qualified basis. Commenters also requested
that the Treasury Department and the IRS consider whether rules are
needed to allocate basis in qualified property in the case of
vertically integrated companies that manufacture, for example, ingots,
wafers, and semiconductors. Section 48D does not address methods of
allocating basis. Section 48D is an investment credit under section 46,
and, thus, the investment credit rules for allocating the basis of
qualified property apply. Further, the Code includes provisions that
control for such purposes (see, for example, section 1012). For these
reasons, the inclusion of special rules for allocating basis in
qualified property as requested by the commenters is not necessary for
purposes of the final regulations.
One commenter requested that the final regulations revise the
definition of ``basis'' in proposed Sec. 1.48D-2(c) to allow
capitalized costs incurred after the placed in service date of
qualified property to qualify for the section 48D credit. Another
commenter requested that the final regulations state that the basis of
an item of qualified property or properties placed in service during
the taxable year is the basis on which the credit is claimed for each
year and provide examples illustrating this rule in the context of
multi-unit or multi-phase manufacturing projects. The Treasury
Department and the IRS agree that a revision is needed and have removed
from the final regulations the proposed requirement that basis is
determined immediately before the qualified property is placed in
service. The final regulations clarify that with respect to any
qualified property, the term ``basis'' has the same meaning as provided
in Sec. 1.46-3(c). Thus, if, for the first taxable year in which
property is placed in service by the taxpayer, the property meets the
definition of qualified property but the basis of the property does not
reflect its full cost for the reason that the total amount to be paid
or incurred by the taxpayer for the property is indeterminate, a credit
will be allowed to the taxpayer for such first taxable year with
respect to so much of the cost as is reflected in the basis of the
property as of the close of such taxable year, and a credit will be
allowed to the taxpayer for any subsequent taxable year with respect to
any additional cost paid or incurred during such subsequent taxable
year and reflected in the basis of the property as of the close of such
subsequent taxable year. The basis of property determined can include
capital expenditures, as defined in section 263 of the Code and
Sec. Sec. 1.263(a)-1 through 1.263(f)-1, with respect to the property.
Additionally, Sec. 1.48D-2(h) clarifies that the term ``placed in
service'' has the same meaning as provided in Sec. 1.46-3(d). Because
the revision made to the final regulations clarifies that the term
``basis'' has the same meaning as provided in Sec. 1.46-3(c), it is
not necessary to provide specific examples of this rule as applied to
qualified property placed in service during a taxable year.
B. Foreign Entity of Concern and Owned By, Controlled By, or Subject to
the Jurisdiction or Direction of
Proposed Sec. 1.48D-2 defined the terms ``foreign entity of
concern'' and ``owned by, controlled by, or subject to the jurisdiction
or direction of'' to have the same meaning as those terms in the
Commerce Proposed Rule. The Commerce Final Rule does not include a
definition of ``owned by, controlled by, or subject to the jurisdiction
or direction of,'' but includes a revised definition of ``foreign
entity of concern.'' The Department of Commerce removed the definition
of ``owned by, controlled by, or subject to the jurisdiction or
direction of'' from the Commerce Final Rule to provide greater
specificity and incorporated the definition of ``owned by, controlled
by, or subject to the jurisdiction of'' into the definition of
``foreign entity of concern'' to clarify that the scope of the terms
are limited to defining foreign entities of concern. To address the
concern that foreign entities of concern could circumvent the
restrictions of the rules by establishing entities for which multiple
foreign entities of concern each have ownership below the 25 percent
threshold, the Commerce Final Rule clarifies that, where at least 25
percent of the person's outstanding voting interest is held directly or
indirectly by any combination of persons who would otherwise be foreign
entities of concern themselves, that person is a foreign entity of
concern.
As stated in the Background section of this preamble, consistent
with the statutory authority provided under sections 50(a)(3) and
(a)(6)(D)(i) and 7805(a), the Treasury Department and the IRS, in
coordination with the Department of Commerce and the Department of
Defense, have incorporated in the final regulations definitional
concepts as determined by the Secretary of Commerce, and contained in
the Commerce Final Rule, necessary for the determination of applicable
transactions under section 50(a)(3) and (a)(6)(D). Section 48D(c)(1)
defines the term ``eligible taxpayer,'' in part, as any taxpayer that
is not a foreign entity of concern (as defined in section 9901(6) of
the William M. (Mac) Thornberry National Defense Authorization Act for
Fiscal Year 2021 (amending 15 U.S.C. 4651)). Section 50(a)(6)(D)(i)
provides rules for when an advanced manufacturing investment credit
allowable under section 48D is subject to recapture and defines a
foreign entity of concern in the same manner as in section 48D(c)(1).
Because section 48D(c)(1) provides rules for when a taxpayer is
eligible to claim the advanced manufacturing investment credit, and
section 50(a)(6)(D)(i) provides rules for when a taxpayer is no longer
eligible for the credit, the statute requires the definition of
``foreign entity of concern'' in both sections to be synonymous. For
these reasons, removing the term ``owned by, controlled by, or subject
to the jurisdiction or direction of'' from the final regulations and
defining the term ``foreign entity of concern'' in the final
regulations as having the same meaning as that term as defined in the
Commerce Final Rule is consistent with the language and purpose of the
statute. The final regulations are revised accordingly.
C. Qualified Investment, Special Rules for Partnerships
Commenters requested a modification to Sec. 1.46-3(f) to permit a
partner's share of the basis of qualified property to be determined
independent of the ratio in which the partners divide the general
profits of the partnership as required under Sec. 1.46-3(f). One of
the commenters noted that section 48D is silent as to how a taxpayer's
basis in qualified property should be allocated in the context of
passthrough entities. Section 48D is among the investment credits
listed under section 46. See section 46(6). The investment credit under
section 46 is a business credit under section 38(b)(1). Thus, property
with respect to which a section 48D credit is determined is section 38
property.
Section 1.704-1(b)(4)(ii), which requires allocations with respect
to the investment credit provided by section
[[Page 84736]]
38(b)(1) to be made in accordance with the partners' interests in the
partnership, provides that allocations of cost or qualified investment
made in accordance with Sec. 1.46-3(f) are deemed to be made in
accordance with the partners' interests in the partnership. Pursuant to
Sec. 1.46-3(f)(1), in the case of a partnership that owns section 38
property, a partner in a partnership is treated as the taxpayer with
respect to the partner's share of the basis of partnership section 38
property. Section 1.46-3(f)(2)(i) provides that a partner's share of
basis is determined in accordance with the ratio in which the partners
share general profits. Pursuant to Sec. 1.46-3(f)(2)(ii), if all
related items of income, gain, loss, and deduction with respect to any
item of partnership section 38 property are specially allocated in the
same manner as if such special allocation is recognized under section
704(a) and (b) and Sec. 1.704-1(b), then each partner's share of the
basis of such item of section 38 property is determined by reference to
such special allocation effective for the date on which the property is
placed in service, rather than in accordance with the ratio in which
the partners share general profits. Thus, Sec. 1.46-3(f), as currently
in effect already permits special allocations of a partner's share of
the basis of an item of section 38 property independent of the ratio in
which the partners divide the general profits of the partnership if all
requirements under Sec. 1.46-3(f)(2)(ii) are met. Also, modifying the
regulations under Sec. 1.46-3(f) to allow for allocations beyond what
is already permitted under Sec. 1.46-3(f), including Sec. 1.46-
3(f)(2)(ii), would have broad implications beyond the application of
section 48D, and for that reason, such modifications would not be
appropriate to include in the final regulations. For the foregoing
reasons, the final regulations do not incorporate the commenters'
recommendations regarding Sec. 1.46-3(f).
D. Qualified Progress Expenditures Election
One commenter requested that the final regulations clarify whether
an election for qualified progress expenditure can be made for expenses
paid or incurred after August 9, 2022, through December 31, 2022. The
Treasury Department and the IRS have determined that no further
clarification is necessary concerning the availability of a progress
expenditures election. Section 48D(b)(5) applies rules similar to the
progress expenditures rules of section 46(c)(4) and (d) as in effect on
the day before the date of enactment of the Revenue Reconciliation Act
of 1990. Section 107(f)(1) of the CHIPS Act provides that the section
48D credit can be claimed for property placed in service after December
31, 2022, and for any property the construction of which began prior to
January 1, 2023, only to the extent of the basis thereof attributable
to the construction, reconstruction or erection after the date of
enactment (August 9, 2022). Consistent with the statute, Sec. 1.48D-
2(j)(3)(i) of the final regulations provides that the taxpayer may
elect, as provided in Sec. 1.46-5, which provides the rules governing
qualified progress expenditures, to increase the qualified investment
with respect to an advanced manufacturing facility of an eligible
taxpayer for the taxable year by any qualified progress expenditures
made after August 9, 2022. Accordingly, an election for qualified
progress expenditures can be made for expenses paid or incurred after
August 9, 2022, and on or before December 31, 2022. In addition, the
final regulations under Sec. 1.48D-2(j)(3)(ii) clarify that, if
progress expenditure property is being constructed by or for a
partnership or S corporation, the rules of Sec. 1.46-5(o)(1) and (p)
do not prohibit a partnership or S corporation from making a qualified
progress expenditure election under Sec. 1.46-5 if such partnership or
S corporation intends to make an elective payment election under
section 48D(d) and Sec. 1.48D-6 with respect to a section 48D credit
determined with respect to such qualified property.
One commenter requested that the final regulations or other
guidance provide guidance on the definitions of ``self-constructed''
versus ``non-self-constructed property'' and ``integrated unit'' for
purposes of determining the construction period under Sec. 1.46-5.
Pursuant to Sec. 1.46-5(d), whether a property, including qualified
property under section 48D(b)(2) and the section 48D regulations, is
progress expenditure property is determined based on the facts known at
the close of the first taxable year in which construction begins, or if
later, at the close of the first taxable year to which a progress
expenditures election is made. Whether property is ``self-constructed''
versus ``non-self-constructed property'' or an ``integrated unit''
pursuant to Sec. 1.46-5(k), (l) and (e)(3), respectively, is also a
factual determination. Additional guidance on the definitions of
``self-constructed'' versus ``non-self-constructed property'' and
``integrated unit,'' would inject significant complexity into the final
regulations and likely cause additional uncertainty regarding the scope
of those terms. Such guidance would have implications for any
investment tax credit, including, for example, the rehabilitation
credit under section 47 and the energy credit under section 48, for
which a taxpayer can made a qualified progress expenditures election.
For these reasons, such guidance is not appropriate to be included in
the final regulations. Accordingly, the final regulations do not
address the modifications requested by the commenter.
One commenter requested that the final regulations provide that the
percentage of completion limitation for non-self-constructed property
under Sec. 1.46-5(j)(6) does not apply or that it be amended to allow
for a greater percentage (up to 66 percent) of completion for
semiconductor tooling equipment. The commenter argued that some tooling
equipment manufacturers require a payment of as much as 90 percent of
the total contract price in the first year the order is placed. Section
1.46-5(j)(6)(i) provides: (1) payments made in any taxable year may be
considered qualified progress expenditures for non-self-constructed
property only to the extent they are attributable to progress made in
construction (percentage of completion limitation); (2) progress will
generally be measured in terms of the manufacturer's incurred cost as a
fraction of the anticipated cost (as adjusted from year to year); and
(3) progress is presumed to occur not more rapidly than ratably over
the normal construction period but the taxpayer may rebut the
presumption by clear and convincing evidence of a greater percentage of
completion. Section 1.46-5(j)(6)(i) provides sufficient flexibility for
taxpayers that intend to claim a section 48D credit for qualified
progress expenditures. The commenter requested a modification to the
percentage of completion limitation for non-self-constructed property
under Sec. 1.46-5(j)(6) for semiconductor tooling equipment only;
however, such modification would require a careful examination of any
implications for all other investment tax credits for which a taxpayer
can make a qualified progress expenditures election, including, for
example, the rehabilitation credit under section 47 and the energy
credit under section 48. For these reasons, the final regulations do
not adopt the commenter's recommendations.
E. Definitions of Semiconductor and Semiconductor Manufacturing
1. In General
Commenters requested that the final regulations expand the
definition of
[[Page 84737]]
``semiconductor'' and ``semiconductor manufacturing'' to encompass
additional products, substances, and processes. The commenters
requested that, among other materials and substances, wafers, diamond
wafer substrates, ingots, boules, high-purity silicon, silicon carbide,
polysilicon, semiconductive substances, III-V compounds, ceramics,
lithographic materials, specialty adhesives and cleaners, metals and
dielectrics, and quantum electronics be included in the definition of
``semiconductor.'' Commenters also requested that the final regulations
modify the definition of ``semiconductor manufacturing'' if the
definition of ``semiconductor'' is expanded to include additional
products and substances.
Consistent with the statutory authority provided under sections
50(a)(3) and (a)(6)(D)(i) and 7805(a), the Treasury Department and the
IRS, in coordination with the Department of Commerce and the Department
of Defense, have incorporated in the final regulations definitional
concepts that are consistent with the Commerce Final Rule and necessary
for the determination of both eligibility for the section 48D credit
and applicable transactions under section 50(a)(3) and (a)(6)(D).
Accordingly, the final regulations provide that a taxpayer may
claim a section 48D credit for qualified property placed in service as
part of an advanced manufacturing facility the primary purpose of which
is semiconductor manufacturing. The final regulations define
``semiconductor manufacturing'' as semiconductor wafer production,
semiconductor fabrication, and semiconductor packaging.
The remainder of this section III.E of this Summary of Comments and
Explanation of Revisions discusses the definitions adopted in the final
regulations of the terms ``semiconductors,'' ``semiconductor
manufacturing,'' ``semiconductor wafer production,'' ``semiconductor
fabrication,'' and ``semiconductor packaging.''
2. Semiconductors
The term ``semiconductor'' is among those definitional concepts
necessary for the determination of whether a transaction is a
significant transaction involving the material expansion of
semiconductor manufacturing capacity in a foreign county of concern
(emphasis added). Because the term ``semiconductor'' is also a
definitional concept necessary for the determination of when a taxpayer
is eligible to claim the advanced manufacturing investment credit, the
statute requires the definition of ``semiconductor'' for purposes of
sections 48D and 50(a)(6)(D)(i) to be synonymous. Moreover, failing to
define the term ``semiconductor'' for purposes of the section 48D
regulations would contravene the statutory directive under section
50(a)(6)(D)(i) to define what is a ``significant transaction'' for the
expansion of semiconductor manufacturing capacity other than with
regard to certain ``legacy semiconductors.'' In addition, section
9901(9) of the William M. (Mac) Thornberry National Defense
Authorization Act, as redesignated by section 103(a)(2) of the CHIPS
Act, for Fiscal Year 2021 (15 U.S.C. 4651), provides that the term
``semiconductor'' has the same meaning given that term by the Secretary
of Commerce. For these reasons, the Treasury Department and the IRS
decline to expand the definition of ``semiconductor'' to include
additional products and substances beyond what is provided in the
Commerce Final Rule, as suggested by the commenters.
Consistent with the definition of ``semiconductor'' in the Commerce
Final Rule (15 CFR 231.115), and pursuant to the statutory authority
provided under sections 50(a)(3) and (a)(6)(D)(i) and 7805(a), the
final regulations provide that a semiconductor is an integrated
electronic device or system most commonly manufactured using materials
such as, but not limited to, silicon, silicon carbide, or III-V
compounds, and processes such as, but not limited to, lithography,
deposition, and etching. Such devices and systems include, but are not
limited to, analog and digital electronics, power electronics, and
photonics, for memory, processing, sensing, actuation, and
communications applications.
3. Definition of Semiconductor Manufacturing
One commenter requested that the final regulations expand the
definition of ``semiconductor manufacturing'' to cover a broader space
(aerospace) semiconductor manufacturing process. As noted in section
IV.E of this Summary of Comments and Explanation of Revisions, section
48D is silent on the topic of semiconductor manufacturing in space or
whether semiconductor manufacturing can occur in space. Whether
semiconductor manufacturing can occur in space would require a careful
examination of all relevant facts and circumstances, any applicable
Code provisions and Federal income tax principles apart from those
found in section 48D and the section 48D regulations. As such, changing
the definition of semiconductor manufacturing to include an aerospace
semiconductor manufacturing process, as requested by the commenter, is
beyond the scope of section 48D and the section 48D regulations.
Accordingly, the final regulations do not adopt rules to address
semiconductor manufacturing in space.
4. Semiconductor Wafer Production
As previously discussed, commenters requested that the final
regulations modify the definition of ``semiconductor manufacturing''
(and synonymously, the term ``manufacturing of semiconductors'') if the
definition of ``semiconductor'' is expanded to include additional
products and substances. Although the final regulations do not expand
the definition of ``semiconductor'' beyond what is provided in the
Commerce Final Rule, the final regulations clarify the definition of
``semiconductor manufacturing'' by specifying that it includes
``semiconductor wafer production'' but not further upstream production
processes, pursuant to the statutory authority provided under sections
50(a)(3) and (a)(6)(D)(i) and 7805(a). The clarification that
``semiconductor manufacturing'' includes ``semiconductor wafer
production'' is consistent with the definition of ``semiconductor
manufacturing'' in the Commerce Final Rule (15 CFR 231.116) issued
pursuant to section 103(b) of the CHIPS Act (15 U.S.C. 4652), which
provides that, for purposes of the Expansion Clawback (described
later), the term ``semiconductor manufacturing'' has the same meaning
given that term by the Secretary of Commerce, in consultation with the
Secretary of Defense and the Director of National Intelligence.
However, the production of additional products and substances
requested by commenters to be included in ``semiconductor
manufacturing'' would not be appropriate as those are materials that
are consumed or substantially transformed during the semiconductor
manufacturing processes, and not included in the definition of
``semiconductor manufacturing'' in the Commerce Final Rule. For these
reasons, the final regulations clarify that the definition of the term
``manufacturing of semiconductors'' (and synonymously ``semiconductor
manufacturing'') includes semiconductor wafer production but excludes
the production of precursor materials such as polysilicon from the
scope of the definition.
[[Page 84738]]
The final regulations define the term ``semiconductor wafer
production'' to include ``the processes of growing single-crystal
ingots and boules, wafer slicing, etching and polishing, bonding,
cleaning, epitaxial deposition, and metrology'' (emphasis added). The
Commerce Final Rule defines the term ``semiconductor wafer production''
to include the processes of wafer slicing, polishing, cleaning,
epitaxial deposition, and metrology. The final regulations differ from
the Commerce Final Rule by including ``growing single-crystal ingots
and boules,'' ``etching,'' and ``bonding'' in the definition of
``semiconductor wafer production'' because the purposes of the relevant
provisions in the Commerce Final Rule and those in the section 48D
regulations differ.
The CHIPS Act established the section 48D credit for the purpose of
incentivizing the manufacturing of semiconductors and semiconductor
manufacturing equipment within the United States and amended section
50(a) to provide for recapture of the section 48D credit if an
applicable taxpayer engages in an applicable transaction. Thus, the
section 48D regulations include definitions and rules that apply for
determining who is an eligible taxpayer, what qualifies as qualified
property or an advanced manufacturing facility, and whether the
beginning of construction requirement is met.
However, the purposes of relevant definitions and rules in the
section 48D regulations differ from the purpose of the Commerce Final
Rule, which relates to implementing the CHIPS Act's ``Expansion
Clawback.'' As a matter of United States national security interests, a
funding recipient is required by statute to enter into an agreement
with the Department of Commerce restricting engagement by the funding
recipient or its affiliates in any significant transaction involving
the material expansion of semiconductor manufacturing capacity in
foreign countries of concern. Failure by a funding recipient (or its
affiliate) to comply with the restriction on semiconductor
manufacturing capacity expansion in foreign countries of concern may
cause the Expansion Clawback to apply, resulting in recovery of the
full amount of Federal financial assistance provided to the funding
recipient.
The differences between the meaning of ``semiconductor wafer
production'' in the Commerce Final Rule and in the final regulations
reflects the difference between the purposes of the two rules as
intended by Congress. The Expansion Clawback prohibits funding
recipients from knowingly engaging in a significant transaction, and
the section 48D credit incentivizes taxpayers to engage in the
manufacturing of semiconductors and semiconductor manufacturing
equipment in the United States, provided the applicable taxpayer does
not also engage in an applicable transaction. For these reasons, the
Treasury Department and the IRS, after consultation with the Department
of Commerce and the Department of Defense pursuant to the statutory
authority provided under sections 50(a)(3) and (a)(6)(D)(i) and
7805(a), have determined that a clarification is necessary to confirm
that for purposes of the section 48D credit, ``semiconductor wafer
production'' includes growing single-crystal ingots and boules, wafer
slicing, etching and polishing, bonding, cleaning, epitaxial
deposition, and metrology. The Treasury Department and the IRS note
that the term ``semiconductor wafer production'' in the final
regulations also includes growing single-crystal ingots and boules,
wafer slicing, etching and polishing, bonding, cleaning, epitaxial
deposition, and metrology as applied to the production of solar wafers.
The Treasury Department and the IRS note this after coordination with
the Department of Commerce and the Department of Defense due to
specific supply chain and national security considerations regarding
the production of solar wafers not present in the case of other related
products.
5. Semiconductor Fabrication
The final regulations provide that the term ``semiconductor
fabrication'' includes ``the process of forming devices such as
transistors, poly capacitors, non-metal resistors, and diodes, as well
as interconnects between such devices, on a wafer of semiconductor
material'' (emphasis added). The Commerce Final Rule defines the term
``semiconductor fabrication'' to include the process of forming devices
such as transistors, poly capacitors, non-metal resistors, and diodes
on a wafer of semiconductor material. The final regulations differ from
the Commerce final rule by including ``interconnects between such
devices.''
The difference between the definition of ``semiconductor
fabrication'' in the Commerce Final Rule and the final regulations with
respect to ``interconnects between such devices'' reflects the
difference between the purpose of the section 48D regulations and the
Expansion Clawback. As explained in section III.E.4 of this Summary of
Comments and Explanation of Revisions, the Expansion Clawback prohibits
funding recipients from knowingly engaging in a significant
transaction, whereas the section 48D credit incentivizes taxpayers to
engage in the manufacturing of semiconductors and semiconductor
manufacturing equipment in the United States, provided the applicable
taxpayer does not also engage in an applicable transaction. For these
reasons, the Treasury Department and the IRS, in coordination with the
Department of Commerce and the Department of Defense, and pursuant to
the statutory authority provided under sections 50(a)(3) and
(a)(6)(D)(i) and 7805(a), have determined that a clarification is
necessary to confirm that for purposes of the section 48D credit,
``semiconductor fabrication'' includes the process of forming
interconnects between such devices.
6. Semiconductor Packaging
Several commenters requested that the definition of ``semiconductor
manufacturing'' be revised to include assembly and testing within all
stages of packaging. Commenters also requested that the final
regulations provide definitions of the terms ``assembly'' and
``testing.'' As previously noted, consistent with the statutory
authority provided under sections 50(a)(3) and (a)(6)(D)(i) and
7805(a), the Treasury Department and the IRS, in coordination with the
Department of Commerce and the Department of Defense, have incorporated
in the final regulations definitional concepts as determined by the
Secretary of Commerce, and contained in the Commerce Final Rule
necessary for the determination of applicable transactions under
section 50(a)(3) and (a)(6)(D). The preamble to the Commerce Proposed
Rule clarifies that ``semiconductor manufacturing'' includes both
front-end fabrication as well as back-end manufacturing including
assembly, testing, and packaging of semiconductors. Accordingly,
revising the definition of ``semiconductor manufacturing'' to include
``assembly'' and ``testing'' and providing definitions of ``assembly''
and ``testing'' is consistent with the purpose of the section 48D
credit to incentivize the manufacture of semiconductors within the
United States. Accordingly, Sec. 1.48D-2(n) of the final regulations
provides that semiconductor packaging includes assembly and testing.
Section 1.48D-2(n)(4) and (5) of the final regulations provide
definitions of ``assembly'' and ``testing,'' respectively.
One commenter requested that the final regulations clarify that the
term
[[Page 84739]]
``semiconductor packaging'' include the manufacturing of IC-substrates.
As stated in the Background section of this preamble, consistent with
the statutory authority provided under sections 50(a)(3) and
(a)(6)(D)(i) and 7805, the Treasury Department and the IRS, in
coordination with the Department of Commerce and the Department of
Defense, have incorporated in the final regulations definitional
concepts as determined by the Secretary of Commerce, and contained in
the Commerce Final Rule necessary for the determination of applicable
transactions under section 50(a)(3) and (a)(6)(D). Consistent with the
Commerce Final Rule, the final regulations define the term
``semiconductor packaging'' as the process of enclosing a semiconductor
in a protective container (package) and providing external connectivity
for the assembled integrated circuit. The manufacturing of a substrate
used during the semiconductor packaging process is not part of
``semiconductor packaging'' as defined under the final regulations. For
the foregoing reason, the final regulations do not adopt the
commenter's recommendation.
F. Definitions of Semiconductor Manufacturing Equipment, Subsystems,
and Manufacturing Semiconductor Manufacturing Equipment
Commenters requested that the final regulations modify the
definition of ``semiconductor manufacturing equipment'' to include
direct and indirect materials integral to the semiconductor
manufacturing equipment, such as, electronic grade isopropyl alcohol,
precision bearings, industrial gases including high purity and general
purpose nitrogen, chemicals such as fluoropolymers peroxides and
fluorogases, lens and mirrors, and components. Commenters requested
that the final regulations define the term ``subsystem'' as highly
engineered and specialty equipment that is either sold directly to, or
primarily produced for, a semiconductor fabricator or a third-party
equipment manufacturer.
Among other requirements, section 48D(b)(2) and Sec. 1.48D-3(c)
(referencing Sec. 1.48-1(c) and (d)) require that property be tangible
depreciable property, for example, production machinery, to meet the
definition of qualified property. Gases, chemicals, and materials, such
as IC-substrates and diamond wafer substrates, and semiconductive
substances, that are consumed, utilized, or substantially transformed
in a similar manner during the manufacturing process does not meet the
threshold requirement of section 48D(b)(2) and Sec. 1.48D-3(c) because
they are not tangible depreciable property for purposes of the section
48D credit.
For the foregoing reason, the Treasury Department and the IRS
decline to adopt the commenters' requests to modify the definition of
``semiconductor manufacturing equipment'' to include such materials.
The final regulations clarify that ``semiconductor manufacturing
equipment'' means the highly engineered specialized equipment used in
the manufacturing of semiconductors as defined in Sec. 1.48D-2(g) and
the subsystems that enable, or are incorporated into, the manufacturing
equipment. This definition will eliminate uncertainty in determining
whether property is semiconductor manufacturing equipment, as opposed
to consumable materials, chemicals, or gases, that do not meet the
definition of semiconductor manufacturing equipment.
The Treasury Department and the IRS decline to adopt the
commenters' recommendations to define the term ``subsystem'' as highly
engineered and specialty equipment that is either sold directly to, or
is primarily produced for, a semiconductor fabricator or a third-party
equipment manufacturer. Providing such a definition would inject
significant complexity into the final regulations. Consistent with the
definition of semiconductor manufacturing equipment in the proposed
regulations, Sec. 1.48D-2(o) provides that the term ``semiconductor
manufacturing equipment'' includes the subsystems that enable, or are
incorporated into, the manufacturing equipment. Additionally, property
that may be considered a subsystem must also meet the requirements of
section 48D and the section 48D regulations.
Commenters also requested that the list of examples of
``semiconductor manufacturing equipment'' be expanded to include any
property that is considered property integral to the operation of an
advanced manufacturing facility under proposed Sec. 1.48D-3(f)(1). The
Treasury Department and the IRS have determined that such a rule is
inconsistent with the purpose and structure of the statute, which
clearly contemplates that not all property integral to the operation of
an advanced manufacturing facility be treated as semiconductor
manufacturing equipment. Although certain property, such as a gas
handling system, may be property integral to the operation of an
advanced manufacturing facility under section 48D(b)(2)(A)(iv) and
proposed Sec. 1.48D-3(f), that property does not, by application of
the standard in section 48D(b)(2)(A)(iv) and proposed Sec. 1.48D-3(f),
meet the definition of semiconductor manufacturing equipment under
Sec. 1.48D-2(o) of the final regulations.
Commenters requested that the final regulations clarify that the
list of examples of semiconductor manufacturing equipment is non-
exclusive and provide an illustrative list of subsystems to include,
items such as specialty glass lenses, photomasks, lenses and mirrors
like those made of calcium fluoride or high-purity fused silica, lens
assemblies for wafer defect inspection following wafer printing, light
sources or other major components of photolithography systems, and
advanced ceramic products. The Treasury Department and the IRS have
determined that such clarifications are appropriate for defining
``semiconductor manufacturing equipment.'' Accordingly, the final
regulations clarify that the list of examples of semiconductor
manufacturing equipment and subsystems is non-exclusive and includes
additional examples of property that may qualify as semiconductor
manufacturing equipment and subsystems. The Treasury Department and the
IRS again note that property that may be considered a subsystem must
also meet the requirements of section 48D and the section 48D
regulations.
Commenters further requested that the final regulations clarify
that a component, part or subsystem may be considered semiconductor
manufacturing equipment on a case-by-case basis, and provide factors
that are persuasive, including industry definitions, CHIPS Act funding,
complexity of part, or other United States Government Agency
categorizations that define it as semiconductor equipment. As stated in
the Background section of this preamble, consistent with the authority
granted by sections 50(a)(3) and (a)(6)(D)(i) and 7805(a), the Treasury
Department and the IRS, in coordination with the Department of Commerce
and the Department of Defense, have incorporated in the final
regulations definitional concepts as determined by the Secretary of
Commerce, and contained in the Commerce Final Rule necessary for the
determination of applicable transactions under section 50(a)(3) and
(a)(6)(D). For this reason, the Treasury Department and the IRS have
determined that incorporating definitions from other United States
Government agencies that define semiconductor equipment for other
purposes would not be appropriate. The Treasury Department and the IRS
have further determined that including a case-by-case facts and
circumstances
[[Page 84740]]
rule as suggested by the commenters would inject significant complexity
into the final regulations and likely cause additional uncertainty
regarding the scope of the term ``semiconductor manufacturing
equipment'' due to its inherently factual nature. As a result, the
final regulations do not incorporate the commenters' recommendations.
The Treasury Department and the IRS note that proposed Sec. 1.48D-
2(n) would define ``manufacturing semiconductor manufacturing
equipment'' as the physical production of semiconductor manufacturing
equipment in a manufacturing facility. As further described in section
V.A. of this Summary of Comments and Explanation of Revisions, the
final regulations modify the proposed definition of ``advanced
manufacturing facility'' by removing the requirement that such a
facility manufacture ``finished'' semiconductor manufacturing
equipment. Consistent with the modification, the final regulations
define the term ``manufacturing of semiconductor manufacturing
equipment'' to require that that such semiconductor manufacturing
equipment be used by an advanced manufacturing facility engaged in the
manufacturing of semiconductors as defined in Sec. 1.48D-2(g) of the
final regulations.
IV. Comments on and Changes to Proposed Sec. 1.48D-3
A. Part of an Advanced Manufacturing Facility
Commenters requested clarification that a taxpayer's ownership of
an advanced manufacturing facility is not a prerequisite for claiming
the section 48D credit when a taxpayer places in service qualified
property that is co-located on an advanced manufacturing facility and
otherwise meets the requirements of section 48D and the final
regulations. One commenter requested that the final regulations provide
that property that is physically located or co-located on an advanced
manufacturing facility and integral to the operation of the advanced
manufacturing facility be considered part of the advanced manufacturing
facility. The Treasury Department and the IRS agree that neither
section 48D(b)(1) and (2), nor any other provision under section 48D,
require a taxpayer to own the advanced manufacturing facility as a
prerequisite to determining a section 48D credit. Section 48D(b)(1) and
(2) mandate that, among other requirements, property be placed in
service as part of, and, integral to the operation of an advanced
manufacturing facility to be ``qualified property'' for purposes of the
section 48D credit. Therefore, the final regulations include a
definition of ``part of an advanced manufacturing facility'' to clarify
that property is part of the advanced manufacturing facility if the
property is physically located or co-located either (1) at the advanced
manufacturing facility, or (2) on a contiguous piece of land to the
advanced manufacturing facility. The final regulations clarify that
parcels or tracts of land are considered contiguous if they possess
common boundaries and would be contiguous but for the interposition of
a road, street, railroad, public utility, stream or similar property.
Generally, property that is not physically located or co-located at the
advanced manufacturing facility or on a piece of land contiguous to the
advanced manufacturing facility is not part of an advanced
manufacturing facility.
The Treasury Department and the IRS are aware that certain
properties, for example, a water or wastewater treatment plant, may not
be physically located or co-located at an advanced manufacturing
facility or on a contiguous piece of land to the advanced manufacturing
facility, but could be integral to the operation of the advanced
manufacturing facility. For this reason, a rule allowing such
properties in certain situations to be considered part of an advanced
manufacturing facility is appropriate for purposes of the section 48D
credit. Accordingly, the final regulations provide that property that
is not located or co-located at an advanced manufacturing facility or
on a contiguous piece of land to the advanced manufacturing facility
may be considered part of an advanced manufacturing facility if the
property is (1) owned by the same taxpayer as the entire advanced
manufacturing facility, (2) connected to the advanced manufacturing
facility (for example, via pipeline), and (3) the sole purpose,
function, and output of the property is dedicated to the operation of
the advanced manufacturing facility. However, such property must also
meet the requirements of section 48D and the section 48D regulations.
The final regulations include two examples to illustrate the
application of section 48D(b) and Sec. 1.48D-3(f).
B. Buildings and Offices
Commenters requested that the final regulations expand the
definition of ``qualified property'' to include an existing building
that is purchased but not reconditioned or re-built by the taxpayer. It
would be inconsistent with the statute to allow a building that is
purchased but not reconstructed by the taxpayer to be ``qualified
property'' for purposes of the section 48D credit. Section
48D(b)(2)(A)(iii)(I) provides that the term ``qualified property''
means property that is, among meeting other requirements,
``constructed, reconstructed, or erected by the taxpayer.'' Therefore,
the final regulations retain the rule set forth in proposed Sec.
1.48D-3(b)(1).
Commenters requested that the final regulations remove ``offices''
from the exception to the definition of tangible depreciable property
in Sec. 1.48D-3(c)(2) in order to allow certain office space within an
advanced manufacturing facility to meet the definition of tangible
depreciable property in Sec. 1.48D-3(c)(1). It would be inconsistent
with the statute to omit ``offices'' from the exception to the
definition of tangible depreciable property, but further clarification
is necessary concerning the meaning of the term ``office''. Section
48D(b)(2)(B)(ii) excludes from the definition of ``qualified property''
``a building or portion of a building used for offices, administrative
services, or other functions unrelated to manufacturing.'' Accordingly,
the final regulations clarify that the term ``tangible depreciable
property'' does not include a building and its structural components
used for offices. But, in response to the comments received, the final
regulations also provide a list of certain buildings or portions of a
building within an advanced manufacturing facility that are considered
related to manufacturing and not considered offices. However, whether a
particular building or portion of a building is used as an office, for
administrative services, or is unrelated to manufacturing is a factual
determination.
C. Certain Leasing Transactions and Original Use
A commenter requested that the final regulations clarify that a
lessor election under Sec. 1.48-4 to treat the lessee as having
acquired investment credit property is permitted with respect to the
section 48D credit. The commenter also requested that the final
regulations address whether a lessor or lessee that purchases a
previously leased advanced manufacturing facility and subsequently
reconditions or rebuilds the facility is eligible to claim a section
48D credit. The Treasury Department and the IRS agree with the
commenter that a lessor election under Sec. 1.48-4 to treat the lessee
as having acquired investment credit property is permitted by operation
of the statute. Section 48D is
[[Page 84741]]
an investment credit under section 46. Section 50(d)(5) provides that,
for purposes of computing the investment credit, rules similar to the
rules of former section 48(d) (relating to certain leased property) (as
in effect on the day before the date of the enactment of the Revenue
Reconciliation Act of 1990 (Pub. L. 101-508, 104 Stat. 1388 (November
5, 1990)) apply. Section 1.48-4 provides the regulatory requirements
for the time and manner for making an election to treat the lessee as
having purchased the property for purpose of the credit allowed and the
regulatory requirements, including for original use, that must be met
and are applicable for purposes of the election. The Treasury
Department and the IRS decline to address specific examples of leasing
transactions in the final regulations and note that the investment
credit recapture provisions under section 50(a) and regulations,
including Sec. Sec. 1.47-1 through 1.47-3 apply for purposes of the
section 48D credit.
Commenters also requested that the definition of ``original use''
in proposed Sec. 1.48D-3(e) be modified in the final regulations to
include acquired property that is reconditioned or rebuilt by a
different taxpayer. Section 48D(b)(2)(A)(iii)(I) and (II) provide that
``qualified property'' includes property that is constructed,
reconstructed, or erected by the taxpayer, or acquired by the taxpayer
if the ``original use'' of such property begins with the taxpayer.
Thus, the taxpayer must reconstruct or rebuild a property to meet the
``original use'' requirement under section 48D(b)(2)(A)(iii).
Accordingly, the Treasury Department and the IRS decline to adopt this
recommendation.
D. Property Integral to the Operation of an Advanced Manufacturing
Facility
One commenter requested that the sentence in proposed Sec. 1.48D-
3(f)(1) that states, ``Materials, supplies, and other inventoriable
items of property that are transformed into a finished semiconductor or
into a finished unit of semiconductor manufacturing equipment are not
considered property integral to the operation of manufacturing
semiconductors or semiconductor manufacturing equipment'' be modified
to provide that such materials are integral to the operation of an
advanced manufacturing facility. The Treasury Department and the IRS
decline to adopt this recommendation. As noted in section III.I. of
this Summary of Comments and Explanation of Revisions, among other
requirements, section 48D(b)(2) and Sec. 1.48D-3(c) (referencing Sec.
1.48-1(c) and (d)) require that property be tangible depreciable
property, for example, production machinery, to meet the definition of
qualified property. Gases, chemicals, and materials, such as diamond
wafer substrates, and other semiconductive substances, that are
consumed, utilized, or substantially transformed during the
manufacturing process, or any other inventoriable items of property do
not meet the threshold requirement of section 48D(b)(2) and Sec.
1.48D-3(c) to be ``qualified property'' because they are not tangible
depreciable property for purposes of the section 48D credit. Thus, such
property would not be property ``integral to the operation of an
advanced manufacturing facility'' under the statute.
Another commenter requested that the final regulations clarify that
the term ``transformed'' in proposed Sec. 1.48D-3(f)(1) does not refer
to the normal degradation of components of semiconductor manufacturing
equipment. However, a clarification is appropriate for establishing
whether property is integral to the operation of an advanced
manufacturing facility. Accordingly, Sec. 1.48D-3(g)(1) of the final
regulations clarifies that the term ``transformed'' does not include
the normal degradation of components of semiconductor manufacturing
equipment.
The final regulations include a special rule for purposes of
establishing whether property is integral to the operation of a
vertically integrated manufacturing facility. As discussed in section
III.E. of this Summary of Comments and Explanation of Revisions, the
final regulations clarify that the term ``semiconductor manufacturing''
includes semiconductor packaging, semiconductor fabrication, and
semiconductor wafer production but excludes manufacturing processes
related to precursor materials such as polysilicon. Consistent with
this modification, the final regulations provide that, if an advanced
manufacturing facility that is engaged in the manufacturing of
semiconductors within the meaning of Sec. 1.48D-2 also conducts
vertically integrated activities (for example, producing raw materials
and manufacturing ingots, wafers, and semiconductors), then property
integral to the operation of such an advanced manufacturing facility
includes only the property used in the manufacturing of semiconductors
within the meaning of Sec. 1.48D-2.
Commenters requested that examples of property that would normally
be integral to operation of an advanced manufacturing facility in
proposed Sec. 1.48D-3(f)(1) be modified to reflect any modifications
to the definitions of ``semiconductor'' and ``semiconductor
manufacturing equipment'' in the final regulations. Commenters also
requested that the final regulations include additions to the list of
specific property under Sec. 1.48D-3(f)(1) to provide certainty to
taxpayers. The commenters requested that the list include, property
such as electricity distribution equipment, industrial automation and
control equipment, communications devices, lighting products, water
management, conservation, water treatment equipment, materials, and
technologies, and tooling equipment. The Treasury Department and the
IRS have determined that adding to the list of specified property that
would ``normally be integral to the operation of an advanced
manufacturing facility'' consistent with the modification to the
definitions of ``semiconductor manufacturing'' and ``semiconductor
manufacturing equipment'' under Sec. 1.48D-2(n) and (o) of the final
regulations is appropriate for determining whether property is
``integral to the operation of an advanced manufacturing facility.''
Accordingly, Sec. 1.48D-3(g)(3) of the final regulations includes
additional examples of such property.
One commenter requested that proposed Sec. 1.48D-3(f)(2) be
modified to treat research facilities that do not manufacture any type
of semiconductor or semiconductor manufacturing equipment to qualify as
integral to the operation of an advanced manufacturing facility. The
commenter further stated that the restriction in Sec. 1.48D-3(f)(2) of
the March 2023 proposed regulations exceeds the statutory exclusions in
section 48D(b)(2)(B)(ii) for a building or portion of a building used
for offices, administrative services, or other functions unrelated to
manufacturing. The statute is silent concerning the treatment of
research facilities, but does require, pursuant to section
48D(b)(2)(A)(iv), that property be integral to the operation of an
``advanced manufacturing facility'' to meet the definition of
``qualified property.'' As previously noted in the Background section
of this preamble, the March 2023 proposed regulations primarily applied
long-established credit mechanics and procedures common to all
investment tax credits previously set forth in regulations and
subregulatory guidance. Those long-established mechanics and
procedures, including those set forth in Sec. 1.48-1 generally require
that a research facility be used ``in connection'' with the qualifying
activity to be considered used
[[Page 84742]]
as integral part of the activity. Section 48D(b)(3) defines an
``advanced manufacturing facility'' as a ``facility for which the
primary purpose is the manufacturing of semiconductors or semiconductor
manufacturing equipment.'' Under both the March 2023 proposed
regulations and the final regulations, facilities built for pre-pilot
production lines and the manufacture of prototypes would be qualified
property integral to the operation of an advanced manufacturing
facility. Based on the foregoing, a research facility that does not
manufacture semiconductors or semiconductor manufacturing equipment is
not used ``in connection'' with the manufacturing of semiconductors or
semiconductor manufacturing equipment. For these reasons, the final
regulations do not adopt the commenter's recommendation.
E. Semiconductor Manufacturing in Space
One commenter requested that the final regulations clarify that
section 48D directly contemplates semiconductor manufacturing work in
space and explicitly confirm that qualifying advanced manufacturing
activity can occur in space, and on a low-earth orbiter, in particular.
More specifically, the commenter requested that the final regulations:
(1) provide an exception to the definition of buildings and structural
components unrelated to manufacturing for functions that are critical
for human habitation in space; and (2) expand the examples of property
integral to the operations of an advanced manufacturing facility to
include space delivery vehicles, as all of the examples currently
describe either the facility itself or related infrastructure for land-
based manufacturing (for example, docks, railroad tracks, and bridges).
Section 48D does not expressly address semiconductor manufacturing
in space, or whether a ``qualifying advanced manufacturing activity''
can occur in space, and on a low-earth orbiter, in particular. Section
48D is among the investment credits under section 46. Section
50(b)(1)(A) makes ineligible for the investment credit property that is
used predominantly outside the United States. However, section
50(b)(1)(B) provides an exception for property described in section
168(g)(4). Section 168(g)(4)(L) includes an exception for any satellite
(not described in section 168(g)(4)(H), which applies to communication
satellites) or other spacecraft (or any interest therein) held by a
United States person if such satellite or other spacecraft was launched
from within the United States. Whether a low-earth orbiter or property
placed in service on a low-earth orbiter is described in section
168(g)(4)(L) would require a careful examination of all relevant facts
and circumstances, any applicable Code sections and Federal income tax
principles apart from those found in section 48D and the section 48D
regulations. Whether ``buildings'' or structural components that are
critical for human habitation in space are included among the exception
for a building or portion of a building used for offices administrative
services, or other functions unrelated to manufacturing pursuant to
section 48D(b)(2)(B)(ii), also would require a careful examination of
all relevant facts and circumstances, any applicable Code sections, and
Federal income tax principles apart from those found in section 48D and
the section 48D regulations. Similarly, whether property integral to
the operation of an advanced manufacturing facility can include space
delivery vehicles requires a careful examination of all relevant facts
and circumstances. For these reasons, the issues addressed by the
commenter are beyond the scope of the final regulations. Accordingly,
the final regulations do not adopt rules to address semiconductor
manufacturing in space.
V. Comments on and Changes to Proposed Sec. 1.48D-4
A. Definition of Advanced Manufacturing Facility
Section 1.48D-4(b) of the March 2023 proposed regulations would
have provided that the term ``advanced manufacturing facility'' means a
facility of an eligible taxpayer for which the primary purpose is the
manufacturing of finished semiconductors or the manufacturing of
finished semiconductor manufacturing equipment. Commenters requested
that the final regulations omit the term ``finished'' from the
definition of ``advanced manufacturing facility,'' or, define the term
``finished'' if it is retained in the final regulations. Commenters
also requested that conforming changes be made to the definition of
``advanced manufacturing facility'' if the definitions of
``semiconductor,'' ``semiconductor manufacturing equipment,'' or
``subsystems'' are modified by the final regulations.
The Treasury Department and the IRS agree with the commenters that
the term ``finished'' should be removed from the definition of
``advanced manufacturing facility'' in the final regulations to reflect
industry practice and the modifications to the definitions of
``semiconductor manufacturing'' and ``semiconductor manufacturing
equipment'' under Sec. 1.48D-2(n) and (o) of the final regulations.
Accordingly, the definition of ``advanced manufacturing facility'' is
revised in the final regulations by removing the term ``finished.''
Consistent with the revision to the definition of ``advanced
manufacturing facility,'' the term ``finished'' is also removed from
Sec. 1.48D-4(b) and (c)(1) of the final regulations, for purposes of
determining whether the primary purpose of a facility is the
manufacturing of semiconductors or semiconductor manufacturing
equipment.
Commenters requested that the definition of an advanced
manufacturing facility be modified to ensure that industrial gas and
other equipment qualifies when co-located on an advanced manufacturing
facility, and, similarly, clarify what constitutes an advanced
manufacturing facility when multiple taxpayers place in service
qualified property at the same facility. Commenters also requested that
the final regulations define the term ``facility'' as a reasonably
identifiable space, an amenity, a piece of equipment, or an assembly
line that can be distinguished from an entire campus or building where
multiple activities are performed and would allow for bifurcation of
manufacturing campuses or within buildings where certain facilities may
be leveraging the section 48D credit while other facilities may be
leveraging a different tax incentive. One commenter requested that the
final regulations define an advanced manufacturing facility consistent
with the definition of qualified property integral to the operation of
an advanced manufacturing facility in proposed Sec. 1.48D-3(f).
Another commenter requested that the final regulations provide that the
definition of an advanced manufacturing facility include design
facilities that are related to the semiconductor manufacturing process.
The Treasury Department and the IRS decline to adopt these
recommendations by further modifying the definition of an ``advanced
manufacturing facility'' or defining ``facility'' in the final
regulations. Section 48D(b)(3) and Sec. 1.48D-4(b) of the final
regulations define an advanced manufacturing facility as a facility for
which the primary purpose is the manufacturing of semiconductors or the
manufacturing of semiconductor manufacturing equipment within the
meaning of Sec. 1.48D-2. Section 1.48D-2 defines the
[[Page 84743]]
terms semiconductor, semiconductor manufacturing, semiconductor
manufacturing equipment, manufacturing of semiconductors, and
manufacturing of semiconductor manufacturing equipment. Taken together,
the statutory and regulatory provisions define what constitutes an
advanced manufacturing facility for purposes of the section 48D credit.
For these reasons, the final regulations do not include a separate
definition of ``facility'' as requested by the commenters. The
treatment of co-located property is addressed in section IV.A of this
Summary of Comments and Explanation of Revisions.
B. Primary Purpose
Commenters requested that the final regulations include a minimum
threshold that would satisfy the ``primary purpose'' requirement. In
proposed Sec. 1.48D-4(c)(3)(i) (Example 1), a taxpayer manufactures
semiconductor manufacturing equipment that represents approximately 75
percent of the potential output of the taxpayer's facility by cost to
produce such equipment. Section 1.48D-4(c)(3)(i) (Example 1) shows that
the taxpayer satisfied the primary purpose test in proposed Sec.
1.48D-4(c). Proposed Sec. 1.48D-4(c)(3)(ii) (Example 2) reaches the
same conclusion when the taxpayer manufactures certain microscopes for
a semiconductor manufacturing facility and such equipment represents
approximately 75 percent of the potential output (by cost) of the
taxpayer's facility. Commenters requested that the final regulations
state the minimum threshold that would satisfy the primary purpose test
as more than 50 percent. One commenter requested that the final
regulations specify the types of cost that should be considered in the
output test and if research costs in connection with manufacturing
semiconductor or semiconductor equipment should be considered in the
numerator of output test. The commenter further requested that the
regulations should clarify that the output capacity in the quantitative
test should be measured at full life cycle instead of the year placed
in service when the credit is determined. The commenter also requested
that the threshold requirement rule be provided in the regulatory text.
Another commenter requested that the final regulations include an
example of a facility that does not meet the ``primary purpose''
requirement, especially for facilities that do not meet the 75 percent
threshold.
The Treasury Department and the IRS have determined that the final
regulations should include a minimum threshold that would satisfy the
``primary purpose'' requirement. Accordingly, Sec. 1.48D-4(c)(1) of
the final regulations provides that a minimum threshold of more than 50
percent by cost of production, revenue received in an arm's length
transaction, or units produced satisfies the ``primary purpose''
requirement. Section 1.48D-4(c)(3) of the final regulations include
examples illustrating the application of this rule, including examples
involving semiconductor wafer production and a vertically integrated
manufacturer. However, property placed in service in a taxable year
must still meet the definition of qualified property under section
48D(b)(2) and Sec. 1.48D-3 for its basis to be included as part of the
qualified investment in the advanced manufacturing facility eligible
for the section 48D credit. Specifying the types of cost that should be
considered in the output test and the time period for the measurement
would require a careful examination of all relevant facts and
circumstances, any applicable Code sections and Federal income tax
principles apart from those found in section 48D and the section 48D
regulations. For these reasons, specifying the types of costs that
should be considered and the time period for measurement is not
appropriate for purposes of the final regulations.
One commenter requested that the words ``grows'' and ``grow
wafers'' in proposed Sec. 1.48D-4(c)(2) be removed in the final
regulations if the definition of ``semiconductor'' is revised in the
final regulations to include polysilicon, boules, wafers, and similar
materials with electronic properties manufactured specifically for the
purpose of semiconductor manufacturing. Another commenter requested
that the final regulations clarify that ``primary purpose'' can include
intermediate manufacturing steps or production of components for
finished semiconductors. One commenter requested that the final
regulations provide that, in the case of a vertically integrated
company that manufactures semiconductors, property used in the crystal
and boule growth be treated as property integral to the operation of an
advanced manufacturing facility.
The Treasury Department and the IRS agree, in part, with commenters
and the final regulations adopt, in part, the commenter's request for a
modification to proposed Sec. 1.48D-4(c)(2) by removing ``grows'' and
``grows wafers'' from the final regulations, and providing that primary
purpose can include certain intermediate manufacturing steps to conform
with the definition of ``semiconductor manufacturing'' in Sec. 1.48D-
2(n) of the final regulations. As previously described in section
III.E. of this Summary of Comments and Explanation of Revisions,
semiconductor wafer production includes the processes of growing
single-crystal ingots and boules, as well as wafer slicing, bonding,
etching and polishing, cleaning, epitaxial deposition, and metrology.
Including property used in steps prior to growing single-crystal ingots
and boules in the case of a vertically integrated semiconductor
manufacturer is not consistent with the purpose and structure of the
statute because the primary purpose of such property is not the
manufacturing of semiconductors (as defined in Sec. 1.48D-2(g) of the
final regulations) or the manufacturing of semiconductor manufacturing
equipment (as defined in Sec. 1.48D-2(h) of the final regulations).
Accordingly, the final regulations do not include such a rule for such
vertically integrated businesses.
The final regulations provide examples to illustrate whether a
facility has a primary purpose of manufacturing of semiconductors or
manufacturing of semiconductor manufacturing equipment. The examples
address whether the facility meets the primary purpose test in the
taxable year the property is placed in service. Because the section 48D
is an investment tax credit, and pursuant to Sec. 1.46-3(d)(4), the
investment credit is allowed in the taxable year the property is placed
in service. In addition, the investment tax credit recapture rules
under section 50(a) apply to the section 48D credit. If the property
for which the section 48D credit is claimed ceases to be investment
credit property (as defined in section 50(a)(6)(A)) with respect to the
taxpayer before the close of the 5-year recapture period, then all or a
portion of the section 48D credit is recaptured. If a taxpayer fails to
meet the primary purpose test during any of the years during the 5-year
recapture period, then the facility is no longer an advanced
manufacturing facility, as defined in section 48D(b)(3) and the final
regulations. The property the taxpayer placed in service to claim the
section 48D credit is no longer qualified property under section
48D(b)(2)(A)(iv), because such property is no longer integral to the
operation of an advanced manufacturing facility. Thus, the property has
ceased to be investment credit property with respect to the taxpayer
and, pursuant to section 50(a)(1)(A) and (B), all or a portion of
[[Page 84744]]
the section 48D credit claimed is recaptured.
VI. Comments on and Changes to Proposed Sec. 1.48D-5
A. Definition of Single Advanced Manufacturing Facility Project
Commenters requested that the final regulations expand the list of
items of property that may be treated as a single item for purposes of
the beginning of construction rules to include ``tooling equipment''
and ``semiconductor manufacturing equipment.'' The list in proposed
Sec. 1.48D-5(a)(3) is non-exclusive. However, the Treasury Department
and the IRS have determined that a clarification is appropriate to
clarify that ``tooling equipment'' and ``semiconductor manufacturing
equipment'' can be treated as a single item for purposes of the
beginning of construction. Accordingly, Sec. 1.48D-5(a)(3)(i) of the
final regulations is revised to include ``tooling equipment'' and
``semiconductor manufacturing equipment.''
Commenters requested that the final regulations establish a safe
harbor for satisfying the single advanced manufacturing facility
project determination if a taxpayer meets at least four of the factors
listed under proposed Sec. 1.48D-5(a)(3)(i). As noted in the
Background section of this preamble, the final regulations primarily
apply credit mechanics and procedures common to all investment credits.
It is therefore appropriate for purposes of section 48D to provide a
single project test similar to the test provided in other recent
guidance applicable to investment credits. Accordingly, Sec. 1.48D-
5(a)(3)(i) of the final regulations provides that multiple properties
or facilities will be treated as a single project if, at any point
during construction of the multiple properties or facilities, they are
owned by a single taxpayer (subject to the related taxpayer rule
discussed later in this section of this Summary of Comments and
Explanation of Revisions), and any two or more of the factors listed in
Sec. 1.48D-5(a)(3)(i) are met. Under Sec. 1.48D-5(a)(3)(ii) of the
final regulations, related taxpayers would be treated as one taxpayer
in determining whether multiple facilities or properties are treated as
a single project. Related taxpayers would be defined as members of a
group of trades or businesses that are under common control (as defined
in Sec. 1.52-1(b)).
Commenters also requested that the final regulations modify
proposed Sec. 1.48D-5(a)(3)(i)(F) by changing ``single master
construction contract'' to a ``single master construction plan,'' and
add a new factor based on whether the properties or facilities achieve
efficiencies and economies of scale through shared semiconductor
manufacturing resources. However, planning and designing are generally
regarded as preliminary activities that would not satisfy the Physical
Work Test, and treating multiple items of qualified property as a
single item based on a ``construction plan'' as opposed to a
``construction contract'' would not inform whether construction has
begun for purposes of section 48D. Including a factor based on whether
the properties or facilities achieve efficiencies and economies of
scale through shared semiconductor manufacturing resources would inject
significant complexity into the final regulations and likely cause
additional uncertainty regarding the scope of the term ``single
advanced manufacturing facility project'' due to its inherently factual
nature. Accordingly, the final regulations do not incorporate the
commenters' recommendations.
One commenter requested that the final regulations clarify the
disaggregation of a single advanced manufacturing facility project
under proposed Sec. 1.48D-5(a)(3)(iv). The commenter requested that
the final regulations clarify that the relevant facts and circumstances
to satisfy the continuity requirement for disaggregated separate items
of property or facilities should be the facts and circumstances from
the time that the continuity safe harbor period ends until the property
is placed in service. The Treasury Department and the IRS decline to
adopt the recommendation because it would be inconsistent with the
continuity requirement. Those disaggregated separate items of property
or facilities were not placed in service prior to the continuity safe
harbor deadline and therefore, the taxpayer is not deemed to satisfy
the continuity requirement with respect to those items from the
beginning of construction date through the end of the continuity safe
harbor period. Accordingly, the final regulations do not incorporate
the commenter's recommendation.
The commenter also requested that the final regulations address the
time period for which the remaining disaggregated separate items of
property or facilities may satisfy the continuity requirement under a
facts and circumstances determination, pursuant to proposed Sec.
1.48D-5(a)(3)(iv). The commenter recommended that the period start when
physical work of a significant nature begins with respect to the
disaggregated separate item of property rather than when construction
began based on the single advanced manufacturing facility project. The
commenter recommended that, alternatively, a continuous construction or
continuous effort for any one item of property within the single
advanced manufacturing facility project be attributed to all properties
within the project to satisfy the continuity requirement. The Treasury
Department and the IRS have determined that the relevant facts and
circumstances determination in proposed Sec. 1.48D-5(a)(3)(iv) is
appropriate for determining whether a disaggregated separate item of
property satisfies the continuity requirement. Accordingly, the final
regulations do not incorporate the commenter's recommendation.
B. Beginning of Construction, In General
A commenter requested that the final regulation clarify whether a
taxpayer applies the same test for all construction in progress at one
contiguous location to determine whether construction began before
December 31, 2026. Proposed Sec. 1.48D-5(b)(1) provides that a
taxpayer may establish that construction of an item of property
(defined as a single advanced manufacturing facility project under
proposed Sec. 1.48D-5(a)(3), or an item of qualified property under
proposed Sec. 1.48D-3(b)) of a taxpayer begins under either the
Physical Work Test or the Five Percent Safe Harbor. Thus, whether a
taxpayer applies the same test for all construction in progress at one
contiguous location depends on the unit of property being measured. For
this reason, the Treasury Department and the IRS have determined that a
clarification is not necessary.
C. Physical Work Test
Commenters requested that the final regulations include examples of
on-site and off-site physical work of a significant nature specific to
the semiconductor industry. One commenter recommended, at a minimum,
including on-site activities such as excavation for the foundation of a
facility, pouring concrete into a foundation of a facility, and
installing underground utilities, and including off-site activities
such as the acquisition of key systems, manufacture of components,
mounting equipment, and constructing support structures such as steel
trusses. The Treasury Department and the IRS have determined that
including certain examples of on-site and off-site work to provide
additional certainty to taxpayers is appropriate for determining
whether physical work of a significant nature has occurred.
[[Page 84745]]
Accordingly, Sec. 1.48D-5(c)(2) of the final regulations includes a
non-exclusive list of examples of on-site and off-site activities,
consistent with IRS guidance pertaining to beginning of construction.
D. Five Percent Safe Harbor
One commenter requested that a payment made by the taxpayer for
property that is manufactured, constructed, or produced for the
taxpayer by another person under a binding written contract but is not
yet provided to the taxpayer and is not yet incurred by the other
person is considered paid or incurred with respect to the taxpayer for
purposes of the Five Percent Safe Harbor. As noted, the section 48D
regulations primarily apply long-established credit mechanics and
procedures common to all investment credits, including application of
the principles of section 461. Therefore, the final regulations retain
the rule set forth in proposed Sec. 1.48D-5(d)(2).
E. Continuity Requirement
Commenters requested that the final regulations provide examples of
the facts and circumstances that would support the conclusion that the
taxpayer satisfied the continuity requirement. The Treasury Department
and the IRS have determined that including an example of facts and
circumstances that would support a particular factor being met under
the continuity facts and circumstances test is appropriate for
clarifying the continuity requirement in this context. Accordingly, the
final regulations clarify that a taxpayer has met the factor of paying
or incurring additional amounts included in the total cost of the
property for a taxable year in which it pays or incurs (within the
meaning of Sec. 1.461-1(a)(1) and (2)) five percent or more of the
total cost of the property each calendar year after the calendar year
during which construction of the property began for purposes of section
48D and the section 48D regulations.
One commenter requested that the final regulations include
``industry downturns'' in the non-exclusive list of construction
disruptions under proposed Sec. 1.48D-5(e)(4)(iii). The commenter
explained that the semiconductor industry is highly cyclical in nature
and semiconductor companies typically reduce capital expenditures and
delay on-going construction of new semiconductor facilities during
industry downturns. The commenter recommended defining ``industry
downturn'' as a 20 percent reduction to publicly traded stock value
during the preceding 12-month period. The commenter also requested that
the final regulations include a provision that Treasury may exercise
its authority to identify per se construction disruptions in future
guidance. The Treasury Department and the IRS decline to adopt these
recommendations, but will consider whether future guidance, specific to
any market and construction disruptions, is necessary, as needed.
A commenter requested that the final regulations modify the
continuity safe harbor in proposed Sec. 1.48D-5(e)(6) by creating a
bright-line rule that all property placed in service before December
31, 2036, will be deemed to satisfy the continuity safe harbor. The
commenter argued that the structure of a continuity safe harbor that
measures from the beginning of construction, in the context of
semiconductor manufacturing, creates an incentive to intentionally
delay the beginning of construction date to as late in 2026 as possible
to more closely align the time that construction begins to the
beginning of the tolling of the 10-year safe harbor period. Section
48D(e) provides that a section 48D credit may not be claimed for
property the construction of which begins after December 31, 2026. The
March 2023 proposed regulations provide that a taxpayer can establish
that construction of property has begun by meeting either the Physical
Work Test or the Five Percent Safe Harbor. Under either test, a
taxpayer must meet the Continuity Requirement by demonstrating
continuous construction or continuous efforts based on the relevant
facts and circumstances. In lieu of demonstrating continuous
construction or continuous efforts, however, the taxpayer is deemed to
satisfy the continuity requirement, under the continuity safe harbor,
by placing the property in service within ten calendar years after the
date that the Physical Work Test or the Five Percent Safe Harbor is
first satisfied. Taxpayers are not obligated to satisfy the continuity
safe harbor to meet the continuity requirement. For these reasons, the
Treasury Department and the IRS decline to adopt the commenter's
recommendation in the final regulations.
A commenter requested that the final regulations include a monetary
safe harbor in which a taxpayer is deemed to satisfy the continuous
construction test or continuous efforts test in the case an advanced
manufacturing facility project if the taxpayer pays or incurs a certain
dollar amount of the total cost of the property during each taxable
year before the property is placed in service. Paying or incurring
costs towards completion of a project is one of many factors that may
indicate the continuity requirement is met. As such, the Treasury
Department and the IRS decline to include an additional safe harbor in
the final regulations that is solely dependent on the dollar amount of
monetary spend in a given taxable year. However, as previously
described, the final regulations clarify that a taxpayer has met the
factor of paying or incurring additional amounts included in the total
cost of the property for a taxable year in which it pays or incurs
(within the meaning of Sec. 1.461-1(a)(1) and (2)) five percent or
more of the total cost of the property each calendar year after the
calendar year during which construction of the property began.
VII. Comments on and Changes to Proposed Sec. 1.50-2
A. Applicable Transaction
One commenter requested clarification of whether the term
``applicable transaction'' includes the expansion of manufacturing
semiconductor manufacturing equipment in a foreign country of concern.
Section 50(a)(6)(D) provides that ``applicable transaction'' means a
``significant transaction'' involving the material expansion of
``semiconductor manufacturing capacity'' in a foreign country of
concern. Section 50(a)(6)(D) does not refer to manufacturing
semiconductor manufacturing equipment. For that reason, the term
``applicable transaction'' does not include the expansion of
manufacturing semiconductor manufacturing equipment in a foreign
country of concern. Section 50(a)(6)(E), however, defines the term
``applicable taxpayer'' as any taxpayer who has been allowed a section
48D credit for any prior taxable year. Thus, a taxpayer that was
allowed a section 48D credit for manufacturing semiconductor
manufacturing equipment as defined in Sec. 1.48D-2(g) of the final
regulations is an ``applicable taxpayer'' for purposes of section
50(a)(3) and (a)(6)(D) and would be subject to recapture under those
provisions if the taxpayer engaged in an ``applicable transaction''
involving the material expansion of semiconductor manufacturing in a
foreign country of concern.
Commenters suggested that the final regulations provide that a
transaction does not trigger recapture under section 50(a)(3) if such
transaction does not trigger a clawback under an entity's required
agreement with the Department of Commerce. Consistent with section
50(a)(6)(D), if a taxpayer enters into a required agreement with the
Secretary
[[Page 84746]]
of Commerce, the final regulations define the term ``significant
transaction'' to have the same meaning as provided in the required
agreement for purposes of section 48D and the section 48D regulations.
B. Definition of Applicable Taxpayer
Several commenters requested that the final regulations treat only
partners that actually claim a section 48D credit as an ``applicable
taxpayer,'' as opposed to all partners in the partnership as required
under proposed Sec. 1.50-2(b)(2)(i)(C). Two of the commenters argued
that activities undertaken outside the partnership by one partner
should not trigger recapture of the section 48D credit claimed by
another partner in the partnership. The Treasury Department and the IRS
have determined that certain modifications are appropriate for defining
``applicable taxpayer'' in the context of qualified property owned by a
partnership or S corporation. Accordingly, the final regulations retain
the general definition of ``applicable taxpayer'' from proposed Sec.
1.50-2(b)(2)(i)(A) and include special rules for partnerships and S
corporations.
The final regulations clarify that in the case of property placed
in service by a partnership, the term ``applicable taxpayer'' means any
direct or indirect partner in a partnership: (1) who was allowed a
section 48D credit for such property for any taxable year prior to when
such partnership entered into an applicable transaction and includes
such partnership; (2) with respect to the partner's share of any
section 48D credit allowed for such property prior to when such partner
entered into an applicable transaction; or (3) with respect to the
partner's share of any tax-exempt income from a partnership that made
an election under section 48D(d)(2) for any taxable year prior to when
such partner entered into an applicable transaction. Consistent with
proposed Sec. 1.50-2(b)(2)(i)(B), the final regulations provide that
the term ``applicable taxpayer'' means a partnership that made an
election under section 48D(d)(2) for any taxable year prior to the
taxable year in which the partnership entered into an applicable
transaction. The final regulations include similar rules for S
corporations and shareholders. The final regulations also include
additional examples to clarify the application of the rules regarding
the term ``applicable taxpayer.''
C. Significant Transactions in General and Certain Required Agreements
Under Section 103(b) of the CHIPS Act
Section 50(a)(6)(D) requires that the meaning of the term
``significant transaction'' be determined by the Secretary in
coordination with the Secretary of Commerce and the Secretary of
Defense. Accordingly, the March 2023 proposed regulations defined the
term ``significant transaction'' to align and harmonize the scope of
applicable transactions under section 50(a)(3) with the scope of
prohibited material expansion transactions within the meaning of
proposed 15 CFR 231.121 (relating to the Prohibition on Certain
Expansion Transactions) and included the definition of ``significant
transaction'' in proposed 15 CFR 231.101 as contained in the Commerce
Proposed Rule. However, unlike the Commerce Proposed Rule, the Commerce
Final Rule does not include a definition of ``significant
transaction.'' Rather, pursuant to section 103(b) of the CHIPS Act,
what constitutes a ``significant transaction'' is to be defined in the
required agreement entered into between a funding recipient and the
Secretary of Commerce. Accordingly, the Treasury Department and the IRS
(in coordination with the Secretary of Commerce and the Secretary of
Defense) have determined that, consistent with section 50(a)(6)(D), the
term ``significant transaction'' means either a ``significant
transaction'' as that term is generally defined in Sec. 1.50-
2(b)(10)(i) of the final regulations, or, with respect to a taxpayer
that has entered into a required agreement with the Secretary of
Commerce, as the term ``significant transaction'' is defined in Sec.
1.50-2(b)(10)(ii) of the final regulations, in the required agreement
with the Department of Commerce. Consistent with the definition of
``significant transaction'' in Sec. 1.50-2(b)(10)(ii) of the final
regulations, the defined terms in the required agreement with the
Department of Commerce control for purposes of determining the meaning
of the term ``significant transaction.''
One commenter requested that the section 50(a)(3) and (a)(6)(D)
recapture provisions and the Department of Commerce's award clawback
rules should align the set of restrictions on transactions in foreign
countries of concern to avoid disrupting ordinary business activities
at existing legacy facilities, especially given the length of time of
the advanced manufacturing investment credit recapture period. The
Treasury Department and the IRS note that the final regulations
harmonize the restrictions to the extent provided under the statute.
D. Definition of Significant Transaction
Several commenters requested modifications to the definition of
``significant transaction'' in the March 2023 proposed regulations.
Some commenters requested the final regulations increase the $100,000
threshold for determining whether a transaction is a ``significant
transaction.'' Commenters also requested that the final regulations
explicitly state that transactions with a principal purpose of funding
ordinary course operations (for example, payroll, rent and utilities,
marketing and advertising, and similar items) are not considered
significant.
In response to comments, the Treasury Department and the IRS are
removing the monetary threshold for ``significant transaction'', and,
instead, the revised definition focuses on the type of transaction that
could result in material expansion. This approach is consistent with
the intent of the recapture rule in section 50(a)(3). Accordingly, the
definition of ``significant transaction'' has been modified to include
(1) an investment, whether proposed, pending, or completed, including
any capital expenditure, loan, or gift; (2) the formation of a
subsidiary, whether classified as a corporation or partnership for
Federal tax purposes; (3) a merger, acquisition, or takeover, including
(a) the acquisition of a new or additional ownership interest in an
entity, (b) the acquisition of a material portion of the assets of an
entity, or (c) a consolidation; (4) the formation of a joint venture;
or (5) a long-term lease or concession arrangement under which a lessee
(or equivalent) makes substantially all business decisions concerning
the operation of a leased entity (or equivalent), as if it were the
owner. This definition, coupled with the revision to the definition of
material expansion, would clarify that transactions with a principal
purpose of funding ordinary course operations are not significant
transactions.
One commenter requested that the final regulations eliminate the 85
percent rule under proposed Sec. 1.50-2(b)(10)(iii) from the
definition of ``significant transaction'' or replace it with a simpler
metric based on the ratio of units an entity manufactures in a foreign
country of concern to the units shipped into a foreign county of
concern. Another commenter requested that the Treasury Department and
the IRS coordinate with the Department of Commerce to finalize a single
uniform
[[Page 84747]]
standard to identify what is a ``final product'' for purposes of
proposed Sec. 1.50-2(b)(10)(iii). The proposed definition of
``significant transaction'' was intended to align and harmonize with
the scope of certain prohibited expansion transactions under the
Commerce Proposed Rule, pursuant to the Secretary's authority under
section 50(a)(6)(D)(i) to determine whether transactions are
significant transactions. Accordingly, to maintain this alignment, the
final regulations retain the 85 percent threshold in its consideration
of whether certain production of legacy semiconductors ``predominately
serves the market'' in a foreign country of concern. Because the
meaning of the term ``predominately serves the market'' is intended to
be consistent with the Commerce Final Rule, the Treasury Department and
the IRS decline to interpret ``serves the market'' to refer to the
location to which the semiconductors are first shipped.
Two commenters requested that the prohibition on technology
licensing and joint research be removed from the definition of
significant transaction, noting that the CHIPS Act does not refer to
``technology licensing.'' Several commenters suggested that the
definition of ``technology licensing'' in proposed Sec. 1.50-2(b)(11)
is overly broad and could include general business operations,
nondisclosure agreements, the discussion of products or technology,
patents, trade secrets, know-how, intraparty transfer agreements, or
arrangements operating under current export control authorization. The
commenters requested that the final regulations narrow the definition
to focus on the actual licensing of the technology or products that are
subject to restrictions rather than just the discussion of products or
technology. One commenter suggested that taxpayers and their affiliate
will be required to review and possibly terminate pre-existing
agreements based on the proposed definition.
Removing the prohibition on joint research or technology licensing
agreements with a foreign entity of concern would allow a taxpayer to
circumvent section 50(a)(3) and (a)(6)(D) through the use of joint
research or technology licensing transactions. However, the Treasury
Department and the IRS agree with the commenter's suggestions
concerning the scope of the term ``technology licensing'' in the March
2023 proposed regulations given that the definition of ``technology
licensing'' in the Commerce Final Rule was modified, consistent with
these comments. Accordingly, the final regulations provide that the
terms ``joint research'' and ``technology licensing'' have the same
meaning as provided in 15 CFR 231.105 and 231.120, respectively.
One commenter stated that the affiliated group rule under proposed
Sec. 1.50-2(b)(10)(v) (establishing a 50 percent ownership test) is
inconsistent with the reference in 15 U.S.C. 4652(a)(6)(C)(iii) to
section 1504(a) of the Code. The Treasury Department and the IRS agree
that the affiliated group rule is inconsistent with the reference in 15
U.S.C. 4652(a)(6)(C)(iii) to section 1504(a) and for that reason, the
affiliate group rule has been removed from the final regulations.
E. Existing Facility
Commenters requested that the definition of an ``existing
facility'' in proposed Sec. 1.50-2(b)(5) be revised in the final
regulations to clarify whether the term includes a facility undergoing
production ramp-up and thus, on the date on which qualified property
was placed in service, was not operating at full production level for
which it was designed. One commenter requested that the final
regulations clarify that upgrades and productivity improvements made to
a facility during the ordinary course of business operations is not
considered a significant renovation and the date for measuring
semiconductor manufacturing capacity is the placed in service date as
intended by the statute. The Treasury Department and the IRS have
determined that only facilities built, equipped, and operating prior to
a taxpayer placing in service qualified property as defined in section
48D(b)(2) and Sec. 1.48D-3 are considered to be existing facilities. A
facility that undergoes significant renovations as defined in Sec.
1.50-2(b)(9) of the final regulations would no longer qualify as an
existing facility. The final regulations do not require the existing
facility to be operating at the semiconductor manufacturing capacity
for which it was designed, as required by the March 2023 proposed
regulations. As noted in section VII.G of this Summary of Comments and
Explanation of Revisions, the final regulations modify the definition
of a ``significant renovation'' to mean building new cleanroom space or
adding a production line or other physical space to an existing
facility, such that upgrades and productivity improvements made to a
facility during the ordinary course of business operations would not be
considered a significant renovation.
F. Material Expansion
Commenters requested that the definition of ``material expansion''
in proposed Sec. 1.50-2(b)(7) be modified in the final regulations to
allow for an increase of semiconductor manufacturing capacity greater
than 5 percent. One commenter requested that the 5 percent increase in
capacity be measured on an average basis over the course of a year.
Commenters also requested that the final regulations provide a finite
list specifying business activities, products and processes that
constitute a material expansion of semiconductor manufacturing. The
Treasury Department and the IRS have determined that raising the five
percent threshold for allowable material expansions or measuring the
five percent increase capacity on average over the course of a year
would undermine the objective of the recapture rule under section
50(a)(3). The Treasury Department and the IRS have further determined
that specifying business activities, products and process that
constitute a material expansion of semiconductor manufacturing is
consistent with the statute. Accordingly, the final regulations retain
the five percent threshold and clarify that the increase in capacity is
due to the addition of a cleanroom, production line or other physical
space, or series of such additions during the applicable period. The
final regulations clarify that the term ``material expansion'' includes
any construction of a new facility for semiconductor manufacturing.
G. Significant Renovations and Semiconductor Manufacturing Capacity
Several commenters requested that the scope of the definition of
``significant renovation'' in proposed Sec. 1.50-2(b)(9) be modified
to encompass only new cleanroom construction, production space,
increase in the square footage of an existing facility by a specified
percentage, or actual output of the facility. The commenters argued
that the March 2023 proposed regulations unnecessarily narrowed the
scope of the exemption for legacy semiconductors as enacted, noting
that the CHIPS Act does not include the term ``significant
renovation.'' Some commenters also requested that the ten percent
ceiling for increasing semiconductor manufacturing capacity be
increased to fifteen percent. The commenters further requested that the
final regulations clarify that an operating facility that has not yet
reached its full capacity will be considered an ``existing facility.''
The Treasury Department and the IRS have
[[Page 84748]]
considered the commenters' suggestions and have determined that the
``significant renovation'' and ten percent threshold provisions are
necessary to prevent a taxpayer from circumventing the recapture
provisions of section 50(a)(3)(A) by engaging in a ``significant
renovation'' of an ``existing facility.'' However, the Treasury
Department and the IRS agree with the commenters that clarification is
needed concerning what is the scope of a ``significant renovation.''
Accordingly, the final regulations retain the rules for a ``significant
renovation'' of an existing facility but clarify that a ``significant
renovation'' means building new cleanroom space or adding a production
line or other physical space to an existing facility that, in the
aggregate during the applicable period, increases semiconductor
manufacturing capacity by 10 percent or more.
One commenter requested that the final regulations clarify that,
with respect to a specific facility, a taxpayer's semiconductor
manufacturing capacity is measured by taking into account both (i) the
taxpayer's own semiconductor manufacturing capacity in that facility,
and (ii) any semiconductor manufacturing capacity of another party to
the extent the other party's operations are carried on for the benefit
of the taxpayer. The commenter noted that semiconductor fabrication
companies commonly outsource assembly and test work to third parties
referred to as outsourced semiconductor assembly and test providers, or
``OSATs.'' The commenter further noted that semiconductor manufacturer
may lease a portion of a facility in a foreign country of concern to an
OSAT that performs assembly and test work for the benefit of the
taxpayer within the same facility. One commenter, included as an
attachment to its comments on the March 2023 proposed regulations, a
letter that the commenter sent to the Department of Commerce concerning
the Commerce Proposed Rule. The commenter requested that the Commerce
Final Rule provide that semiconductor manufacturing capacity be
measured in wafer starts per year, as opposed to wafer starts per
month.
Consistent with the Commerce Final Rule in 15 CFR 231.117, the
final regulations provide that semiconductor manufacturing capacity is
appropriately measured in wafer starts per month not including OSAT
production. Section 1.50-2(b)(8) of the final regulations include a
rule for determining ``semiconductor manufacturing capacity'' in the
case of semiconductor wafer production. The final regulations clarify
that wafer production is measured in starts per month and in the case
of a semiconductor wafer production facility that includes the
processes of growing single-crystal ingots and boules, wafer slicing,
etching and polishing, cleaning, epitaxial deposition, and metrology,
manufacturing capacity is measured in wafer starts per month.
H. Technology or Product That Raises National Security Concerns
One commenter requested that the final regulations exclude from the
definition of semiconductors critical to national security, any
semiconductors that reduce carbon emissions because they enhance rather
than reduce U.S. national security (specifically SiC power
semiconductors). The Treasury Department and the IRS appreciate that
the performance advantages offered by compound semiconductors over
silicon semiconductors, such as wider bandgap, lower operating
voltages, and higher electron mobility, are vital to many military
applications. Moreover, the governments of some foreign countries of
concern have identified compound semiconductors as a strategic emerging
industry. They have set ambitious goals for acquisition and development
of compound semiconductor technology and strive to become global
leaders in the industry. However, while exports of certain
semiconductors are not subject to national security or regional
stability export controls, joint research, or technology licensing
involving these products with foreign entities of concern can
nevertheless pose a significant risk to national security. Taxpayers
that claim a section 48D credit should not further that risk. For these
reasons, the Treasury Department and the IRS decline to adopt the
commenter's request.
I. Exception From the Definition of Applicable Transaction for the
Manufacturing of Legacy Semiconductors
Several commenters requested that the final regulations
specifically include assembly test manufacturing (ATM) that uses non-3D
packaging in the definition of legacy semiconductor. The commenters
argued that given that ATM is generally a back-end operation, with
billions of pre-existing investments, it is appropriate for these
operations to be viewed under the definition of legacy unless they
specifically perform 3D integration. The Treasury Department and the
IRS agree with the commenters' suggestion. Accordingly, the final
regulations, consistent with 15 CFR 231.107, clarify that only
semiconductors utilizing advanced 3D integration packaging such as by
directly attaching one or more die or wafer, through silicon vias (TSV)
or through mold vias (TMV), or other advanced methods are not
considered to be legacy semiconductors.
Commenters requested that the final regulations conform the example
of memory semiconductor under proposed Sec. 1.50-2(c)(2)(ii) to
current export controls. Section 50(a)(6)(D)(ii) provides that the
exception for legacy semiconductors applies as defined in section
9902(a)(6) of the William M. (Mac) Thornberry National Defense
Authorization Act for Fiscal Year 2021, as amended by section 103 of
the CHIPS Act. The example of a memory semiconductor in proposed Sec.
1.50-2(c)(2)(ii) is consisted with the statutory definition of a legacy
semiconductor. Accordingly, the Treasury Department and the IRS decline
to revise the example of a memory semiconductor in the final
regulations.
Commenters requested that what is considered a leading or
``legacy'' semiconductor should be adjusted over the course of a 10-
year period and should be connected to authorization permitted under
export control licensing. Proposed Sec. 1.50-2(c)(2)(iii) includes
among the definition of a ``legacy semiconductor'' a semiconductor
identified by the Secretary of Commerce in a public notice issued under
15 U.S.C. 4652(a)(6)(A)(ii). The Secretary of Commerce is required,
pursuant to 15 U.S.C. 4652(a)(6)(A)(ii), to update the definition of
``legacy semiconductor'' on a regular basis and at least every two
years. Thus, the definition of what is considered a leading or legacy
semiconductor will be adjusted over the course of a 10-year period, as
the Secretary of Commerce deems appropriate as reflected in Sec. 1.50-
2(c)(2) of the final regulation.
One commenter requested that the final regulations provide that the
exclusion of any technology from the definition of ``legacy
semiconductor'' in the future pursuant to 15 U.S.C. 4652(a)(6)(A)(ii)
be applied only prospectively and not to any transactions previously
entered into. Section 50(a)(6)(D)(ii) provides that the exception for
legacy semiconductors applies as defined in section 9902(a)(6) of the
William M. (Mac) Thornberry National Defense Authorization Act for
Fiscal Year 2021, as amended by section 103 of the CHIPS Act. Section
103(b) of the CHIPS Act added 15 U.S.C. 4652(a)(6)(A)(ii) and requires
the Secretary of Commerce, after public notice and an opportunity for
comment and if applicable and necessary, to issue
[[Page 84749]]
a public notice identifying any additional semiconductor technology
included in the meaning of the term ``legacy semiconductor'' on a
regular basis, and at least every two years. The commenter's
recommendation to apply only prospectively any technology excluded from
the definition of ``legacy semiconductor'' by the Secretary of Commerce
pursuant to 15 U.S.C. 4652(a)(6)(A)(ii) is beyond the application of
sections 48D and 50 and the section 48D regulations. For that reason,
the Treasury Department and the IRS decline to adopt the commenter's
recommendation. One commenter requested that the final regulations
modify the definition of legacy semiconductors that is of 28 nanometer
generation or older under proposed Sec. 1.50-2(c)(2)(i) by deleting
the reference to gate length and including technologies using the
planar transistor architecture that should be considered the same as 28
nanometer generation technology. The Treasury Department and the IRS
decline to adopt the commenter's recommendation. The proposed
definition of legacy semiconductor with respect to 28 nanometer
generation technology is consistent with the CHIPS Act and accurately
captures the definition of legacy semiconductors. The proposed
definition also prevents a company from using or creating a derivation
of their existing 28 nanometer technology for use in a foreign country
of concern that is inconsistent with the kind of material expansion of
semiconductor manufacturing the CHIPS Act seeks to constrain.
Several commenters requested that the final regulations narrow the
exception under proposed Sec. 1.50-2(c)(3)(iii) to ``advanced'' 3D
packaging techniques, so that TSV and TMV are excluded from the
definition of legacy semiconductor. In coordination with the Department
of Commerce and the Department of Defense, the Treasury Department and
the IRS have incorporated this recommendation in the final regulations.
The Commerce Final Rule clarifies the meaning of the term ``legacy
semiconductor'' with respect to a semiconductor wafer facility, a
semiconductor fabrication facility, and a semiconductor packaging
facility. Again, in coordination with the Department of Commerce and
the Department of Defense, the Treasury Department and the IRS have
incorporated this clarification in the final regulations.
The March 2023 proposed regulations provided a definition of
``legacy semiconductor'' that was identical to the definition in
Commerce Proposed Rule. Consistent with section 50(a)(6)(D)(ii) of the
Code and section 9902(a)(6) of the William M. (Mac) Thornberry National
Defense Authorization Act for Fiscal Year 2021, as amended by section
103 of the CHIPS Act, the final regulations define the term ``legacy
semiconductor'' as having the same meaning as that term is defined in
the Commerce Final Rule, 15 CFR 231.107.
J. Standards for Determining the Satisfaction of the Commissioner
Commenters requested that the final regulations include standards
for establishing what is considered to be to ``the satisfaction of the
Secretary'' or ``the satisfaction of the Commissioner'' for purposes of
section 50(a)(3)(B) and proposed Sec. 1.50-2(a)(2), respectively.
Commenters suggested that the final regulations address how a taxpayer
may demonstrate cessation or abandonment of a project, and further
suggested that those actions could include proof of cancelled
contracts, the withdrawal or cancellation of work permits, a board
resolution that expressly cancels the applicable transaction, or the
issuance of a public statement that expressly cancels the applicable
transaction. Commenters also suggested that final regulations include a
non-exhaustive list of documents that can be used to establish
cessation or abandonment of a project. The Treasury Department and the
IRS have determined that the rules suggested by the commenters, as well
as similar provisions, would likely cause additional uncertainty
regarding the scope of the term ``to the satisfaction of the
Commissioner'' due to its inherently factual nature. As a result, the
final regulations do not incorporate the commenters recommendations.
K. Records Retention
The Treasury Department and the IRS requested comments on the
ability of applicable taxpayers to comply with potential record keeping
requirements in addition to those required by current law and on what
specific procedures should be considered to ensure that the IRS has
sufficient information to determine whether an applicable taxpayer
engages in an applicable transaction within the meaning of section
50(a)(3) and proposed Sec. 1.50-2. Several commenters suggested that
any record retention should be limited to records obtained in the
ordinary course of business. Another commenter suggested the IRS could
include a form or attachment to annual tax returns with basic questions
for the IRS to ascertain whether an applicable taxpayer may have
engaged in an applicable transaction during the taxable year. Section
50(a)(3)(C) provides that the Secretary shall issue regulations or
other guidance as the Secretary determines necessary or appropriate to
carry out the purposes of section 50(a)(3), including regulations or
other guidance which provides for requirements for recordkeeping or
information reporting for purposes of administering the requirements of
section 50(a)(3). The Treasury Department and the IRS have determined
that records retained in a taxpayer's ordinary course of business, and
as required under current applicable periods of limitations under
section 6501 of the Code on assessment and collection of tax under
chapter 1 with respect to the applicable taxpayer's return filed for
the taxable year that includes the close of the 10-year period
beginning on the date such taxpayer placed in service investment credit
property that is eligible for the section 48D credit, are sufficient.
Accordingly, the final regulations do not incorporate any additional
record keeping requirements.
Some commenters requested that the final regulations provide for
more of an alignment of the section 48D credit requirements and the
Department of Commerce grant regulatory requirements including
standardizing the same 10-year recapture or clawback period and
streamline reporting and recordkeeping requirements. The commenters
also requested that responsibility for administering the various
overlapping rules and taxpayer notification requirements be delegated
to a single agency or an interagency body. Section 50(a)(3) provides
for recapture of the section 48D credit if there is an applicable
transaction by an applicable taxpayer before the close of the ten-year
period beginning on the date such property placed in service. Pursuant
to 15 U.S.C. 4652(a)(6)(C)(i), the Commerce Final Rule, 15 CFR 231.202,
provides that the 10-year period for the Expansion Clawback begins on
the date of the award of Federal financial assistance under 15 U.S.C.
4652. The preamble to the Commerce Final Rule clarifies that the
applicable term for the technology clawback (15 CFR 231.203) is defined
in the relevant award documents. Pursuant to the relevant statutes, the
recapture period for a section 48D credit begins on the date the
qualified property is placed in service, and the Expansion Clawback and
technology clawback periods begin on the date of the award of financial
assistance and as defined in the award documents, respectively. For
this
[[Page 84750]]
reason, aligning the recapture period with the clawback period would be
inconsistent with section 50(a)(3)(A).
Section 50(a)(6)(D)(i) requires that the Secretary (in coordination
with the Secretary of Commerce and the Secretary of Defense) define the
term ``significant transaction'' for purposes of section 50. Consistent
with the statutory directive in section 50(a)(6)(D)(i), Sec. 1.50-
2(b)(10) of the final regulations defines the term ``significant
transaction'' as determined by the Treasury Department and the IRS in
coordination with the Department of Commerce and the Department of
Defense. Treasury regulations that otherwise would align or streamline
the reporting and recordkeeping requirements or delegate the
administrative functions to a single agency or interagency body are
beyond the scope of the statute.
L. Private Letter Rulings
Commenters requested that the IRS grant private letter rulings or
other determinations on the beginning of construction, effective date,
costs, and or other matters relevant to section 48D. Consistent with
guidance published in the Internal Revenue Bulletin, the IRS ordinarily
will not issue private letter rulings to a taxpayer regarding the
beginning of construction requirement under section 48D with respect to
property placed in service after these final regulations are published
in the Federal Register. In addition, the IRS may decline to issue a
letter ruling or a determination letter when appropriate in the
interest of sound tax administration, including due to resource
constraints, or on other grounds whenever warranted by the facts or
circumstances of a particular case.
Applicability Date
The final regulations set forth in Sec. Sec. 1.48D-1 through
1.48D-5, and 1.50-2 apply to property that is placed in service after
December 31, 2022, and during a taxable year ending on or after October
23, 2024.
Special Analyses
I. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of the
Office of Management and Budget (OMB) before collecting information
from the public, whether such collection of information is mandatory,
voluntary, or required to obtain or retain a benefit. A Federal agency
may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless the collection of information
displays a valid control number.
This regulation mentions elections that are made in accordance with
section 48D(d)(1) and (d)(2) of the Code and Sec. 1.46-5 of the
Treasury Regulations. These elections are made with Form 3468,
Investment Credit, which are already approved by the OMB under 1545-
0074 for individual/sole proprietor filers, 1545-0123 for business
filers, and 1545-0155 for trust and estate filers. This regulation is
not changing those election requirements; and is not telling taxpayers
to make these elections but explaining their treatment for the credit
if they have made these elections.
This regulation also describes recapture of the advanced
manufacturing investment credit in the case of certain expansions, as
detailed in Sec. 1.50-2(a). The reporting of the recapture event will
still be required to be reported using Form 4255, Recapture of
Investment Credit. This form is approved under OMB control numbers
1545-0074 for individuals/sole proprietors, 1545-0123 for business
entities, and 1545-0166 for trust and estate filers. The final
regulation is not changing or creating new collection requirements not
already approved by OMB on Form 4255.
This regulation includes recordkeeping requirements outlined in
Sec. 1.50-2 for recording transactions, investments, facilities
information, and agreements with the Department of Commerce. The IRS
expects that these records are usual and customary business records;
however, the taxpayers will need to keep these records as long as they
are admissible by the statute, typically for 10 years. Therefore, the
IRS is considering these to be general tax records under Sec. 1.6001-
1. These records are required for the IRS to validate that the
taxpayers have met the regulatory requirements; and are required as
proof that the taxpayer has not engaged in an applicable transaction or
that the taxpayer has ceased or abandoned the applicable transaction
within 45 days of a determination and notice by the Commissioner,
pursuant to section 50(a)(3). For PRA purposes, general tax records are
already approved by OMB under 1545-0074 for individual/sole proprietor
filers, 1545-0123 for business filers, and 1545-0092 for trust and
estate filers.
II. Regulatory Flexibility Act
The Treasury Department and the IRS determined the rule will not
have a significant economic impact on a substantial number of small
entities. Although the rules affect small entities, data are not
readily available about the number of taxpayers affected. Section 48D
affects the semiconductor manufacturing industry, and specifically,
individuals and entities that make qualified investments in facilities
engaged in the manufacturing of semiconductors and semiconductor
manufacturing equipment. The economic impact of these regulations is
not likely to be significant, because the regulations substantially
incorporate statutory changes by the CHIPS Act in establishing section
48D and amending section 50(a). The regulations will also make it
easier for taxpayers to comply with section 48D and the changes to
section 50(a). Pursuant to the RFA (5 U.S.C. chapter 6), the Secretary
hereby certifies that these regulations will not have a significant
economic impact on a substantial number of small entities.
Pursuant to section 7805(f), the notice of proposed rulemaking has
been submitted to the Chief Counsel for the Office of Advocacy of the
Small Business Administration for comment on its impact on small
business. The Chief Counsel for the Office of Advocacy of the SBA did
not provide any comments on the March 2023 proposed regulations.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). This rule
does not include any Federal mandate that may result in expenditures by
State, local, or Tribal governments, or by the private sector in excess
of that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. This rule does not have federalism
implications and does not impose substantial direct compliance costs on
State and local governments or preempt State law within the meaning of
the Executive order.
[[Page 84751]]
V. Regulatory Planning and Review
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
VI. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs has designated this
rule as a major rule as defined by 5 U.S.C. 804(2).
Statement of Availability of IRS Documents
Guidance cited in this preamble is published in the Internal
Revenue Bulletin and is available from the Superintendent of Documents,
U.S. Government Publishing Office, Washington, DC 20402, or by visiting
the IRS website at https://www.irs.gov.
Drafting Information
The principal author of these final regulations is Lani Sinfield,
Office of the Associate Chief Counsel (Passthroughs and Special
Industries), IRS. However, other personnel from the Treasury Department
and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, the 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry, in numerical order, for Sec. 1.50-2 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.50-2 also issued under 26 U.S.C. 50(a)(3)(C), and
50(a)(6).
* * * * *
0
Par. 2. Section 1.48D-0 is revised to read as follows:
Sec. 1.48D-0 Table of contents.
This section lists the table of contents for Sec. Sec. 1.48D-1
through 1.48D-6.
Sec. 1.48D-1 Advanced manufacturing investment credit determined.
(a) Overview.
(b) Determination of credit.
(c) Coordination with section 47.
(1) In general.
(2) Example.
(d) Applicability date.
Sec. 1.48D-2 Definitions.
(a) In general.
(b) Applicable transaction.
(c) Basis.
(1) In general.
(2) Transition rule.
(d) Beginning of construction.
(e) Eligible taxpayer.
(f) Foreign entities.
(1) Foreign entity.
(2) Foreign entity of concern.
(g) Manufacturing of semiconductors.
(h) Manufacturing of semiconductor manufacturing equipment.
(i) Placed in service.
(j) Qualified investment.
(1) In general.
(2) Special rules for certain passthrough entities.
(i) Partnership.
(ii) S corporation.
(iii) Estate or trust.
(3) Qualified progress expenditures election.
(i) In general.
(ii) Special rules for certain passthrough entities.
(4) Examples.
(i) Example 1.
(ii) Example 2.
(k) Section 48D credit.
(l) Section 48D regulations.
(m) Semiconductor.
(n) Semiconductor manufacturing.
(1) Semiconductor wafer production.
(2) Semiconductor fabrication.
(3) Semiconductor packaging.
(4) Assembly.
(5) Testing.
(6) Advanced packaging.
(o) Semiconductor manufacturing equipment.
(p) Statutory references.
(1) Chapter 1.
(2) Code.
(3) Subtitle A.
(q) Applicability date.
Sec. 1.48D-3 Qualified property.
(a) In general.
(b) Qualified property.
(c) Tangible depreciable property.
(1) In general.
(2) Exception.
(3) Buildings or portions of a building not excluded by section
48D(b)(2)(B)(ii).
(d) Constructed, reconstructed, or erected by the taxpayer.
(e) Original use.
(1) In general.
(2) Treatment of inventory.
(f) Part of an advanced manufacturing facility.
(1) In general.
(2) Property that is not located or co-located at an advanced
manufacturing facility or on a contiguous piece of land to the
advanced manufacturing facility.
(g) Integral to the operation of an advanced manufacturing
facility.
(1) In general.
(2) Vertically integrated manufacturers.
(3) Specific examples of integral property.
(4) Research or storage facilities.
(5) Examples.
(i) Example 1.
(ii) Example 2.
(h) Applicability date.
Sec. 1.48D-4 Advanced manufacturing facility of an eligible
taxpayer.
(a) In general.
(b) Advanced manufacturing facility.
(c) Primary purpose.
(1) In general.
(2) No primary purpose.
(3) Examples.
(i) Example 1: Primary purpose; in general
(ii) Example 2: Primary purpose; semiconductor wafer production.
(iii) Example 3: Primary purpose; vertically integrated
manufacturer.
(iv) Example 4: No primary purpose; vertically integrated
manufacturer.
(d) Applicability date.
Sec. 1.48D-5 Beginning of construction.
(a) Termination of credit.
(1) In general.
(2) Property.
(3) Single advanced manufacturing facility project.
(i) In general.
(ii) Related taxpayers.
(A) Definition.
(B) Related taxpayer rule.
(iii) Example.
(iv) Timing of single advanced manufacturing facility project
determination.
(v) Disaggregation.
(vi) Example.
(b) Beginning of construction.
(1) In general.
(2) Continuity requirement.
(c) Physical work test.
(1) In general.
(2) Physical work of significant nature.
(i) In general.
(ii) Exceptions.
(d) Five percent safe harbor.
(1) In general.
(2) Costs.
(3) Cost overruns.
(i) Single advanced manufacturing facility project.
(ii) Example.
(iii) Single property.
(iv) Example.
(e) Continuity requirement.
(1) In general.
(2) Continuous construction.
(3) Continuous efforts.
(4) Excusable disruptions to continuous construction and
continuous efforts tests.
(i) In general.
(ii) Effect of excusable disruptions on continuity safe harbor.
(iii) Non-exclusive list of construction disruptions.
(5) Timing of excusable disruption determination.
(6) Continuity safe harbor.
(i) In general.
(ii) Example.
(f) Applicability date.
Sec. 1.48D-6 Elective payment election.
(a) Elective payment election.
(1) In general.
(2) Partnerships and S corporations.
(3) Irrevocable.
(b) Pre-filing registration required.
[[Page 84752]]
(1) In general.
(2) Manner of registration.
(3) Members of a consolidated group.
(4) Timing of pre-filing registration.
(5) Each qualified investment in an advanced manufacturing
facility must have its own registration number.
(6) Information required to complete the pre-filing registration
process.
(7) Registration number.
(i) In general.
(ii) Registration number is only valid for one year.
(iii) Renewing registration numbers.
(iv) Amendment of previously submitted registration information
if a change occurs before the registration number is used.
(v) Registration number is required to be reported on the return
for the taxable year of the elective payment election.
(c) Time and manner of election.
(1) In general.
(2) Limitations.
(d) Special rules for partnerships and S corporations.
(1) In general.
(2) Election.
(i) Time and manner of election.
(ii) Effect of election.
(iii) Coordination with sections 705 and 1366.
(iv) Partner's distributive share.
(A) In general.
(B) Interim rule.
(C) Partnership requirements.
(v) S corporation shareholder's pro-rata share.
(vi) Timing of tax exempt income.
(3) Disregarded entity ownership.
(4) Electing partnerships in tiered structures.
(i) In general.
(ii) Electing partnerships in tiered structures; interim rule.
(5) Character of tax exempt income.
(6) Determination of amount of the section 48D credit.
(i) In general.
(ii) Application of section 49 at-risk rules to determination of
section 48D credit for partnerships and S corporations.
(iii) Changes in at-risk amounts under section 49 at partner or
shareholder level.
(7) Partnerships subject to subchapter C of chapter 63 of the
Code.
(8) Example.
(e) Denial of double benefit.
(1) In general.
(2) Application of the denial of double benefit rule.
(3) Use of the section 48D credit for other purposes.
(4) Examples.
(i) Example 1.
(ii) Example 2.
(iii) Example 3.
(iv) Example 4.
(f) Excessive payment.
(1) In general.
(2) Reasonable cause.
(3) Excessive payment defined.
(4) Example.
(g) Basis reduction and recapture.
(1) In general.
(2) Basis adjustment.
(i) In general.
(ii) Basis adjustment by partnership or S corporation.
(iii) Basis adjustment of partners and S corporation
shareholders.
(3) Recapture reporting.
(h) Applicability dates.
(1) In general.
(2) Prior taxable years.
0
Par. 3. Sections 1.48D-1 through 1.48D-5 are added to read as follows:
Sec.
* * * * *
1.48D-1 Advanced manufacturing investment credit determined.
1.48D-2 Definitions.
1.48D-3 Qualified property.
1.48D-4 Advanced manufacturing facility of an eligible taxpayer.
1.48D-5 Beginning of construction.
* * * * *
Sec. 1.48D-1 Advanced manufacturing investment credit determined.
(a) Overview. For purposes of section 46 of the Code, the amount of
the advanced manufacturing investment credit under section 48D of the
Code determined for any taxable year is the amount determined under
section 48D and this section and Sec. Sec. 1.48D-2 through 1.48D-6 and
1.50-2 (the section 48D regulations) (subject to any applicable
provisions of the Code that may limit the amount determined under
section 48D), for such taxable year with respect to any advanced
manufacturing facility of an eligible taxpayer. Paragraph (b) of this
section provides the general rules for determining the amount of a
taxpayer's section 48D credit for a taxable year. Paragraph (c) of this
section provides rules coordinating the section 48D credit with the
rules of section 47 of the Code (relating to the rehabilitation
credit). Section 1.48D-2 provides definitions that apply for purposes
of section 48D and the section 48D regulations. Section 1.48D-3
provides rules relating to the definition of qualified property for
purposes of the section 48D credit. Section 1.48D-4 provides rules
relating to the definition of an advanced manufacturing facility of an
eligible taxpayer for purposes of the section 48D credit. Section
1.48D-5 provides rules regarding the beginning of construction of
property for purposes of the section 48D credit. Section 1.48D-6
provides rules related to the elective payment election of the section
48D credit. See Sec. 1.50-2 for additional rules under section
50(a)(3) and (6) of the Code relating to applicable transactions that
result in the recapture of section 48D credits.
(b) Determination of credit. Subject to any applicable sections of
the Code that may limit the credit determined under section 48D, the
section 48D credit for any taxable year of an eligible taxpayer with
respect to any advanced manufacturing facility is an amount equal to 25
percent of the taxpayer's qualified investment for the taxable year
with respect to that advanced manufacturing facility. A section 48D
credit is available only with respect to qualified property that a
taxpayer places in service after December 31, 2022, and, for any
qualified property the construction of which began prior to January 1,
2023, only to the extent of the basis of that property attributable to
the construction, reconstruction, or erection of that property
occurring after August 9, 2022. Under section 48D(e), no section 48D
credit is allowed to a taxpayer for placing qualified property in
service in any taxable year if the beginning of construction of that
qualified property as determined under Sec. 1.48D-5 begins after
December 31, 2026 (the date specified in section 48D(e)).
(c) Coordination with section 47--(1) In general. The qualified
investment with respect to any advanced manufacturing facility of an
eligible taxpayer for any taxable year does not include that portion of
the basis of any property that is attributable to qualified
rehabilitation expenditures, as defined in section 47(c)(2) and Sec.
1.48-12(c), with respect to a qualified rehabilitated building, as
defined in section 47(c)(1) and Sec. 1.48-12(b).
(2) Example: Coordination with section 47. X Corp, a calendar-year
C corporation, owns Building A, a certified historic structure. X
Corp's adjusted basis in Building A is $100,000. Between August 1,
2024, and October 31, 2024, X Corp incurs $1 million to reconstruct,
within the meaning of section 48D(b)(2)(A)(iii)(I) and Sec. 1.48-
12(b)(2)(iv), Building A. X Corp places the reconstructed Building A, a
qualified rehabilitated building, in service on November 15, 2024. Of
the $1 million of capitalized expenditures incurred to reconstruct
Building A (all of which would meet the definition of qualified
investment), $250,000 also meets the definition of qualified
rehabilitation expenditures (QREs). As such, X Corp's qualified
investment in Building A is $750,000 ($1 million-$250,000). X Corp's
qualified investment in Building A remains $750,000 even if X Corp does
not determine a rehabilitation credit with respect to the $250,000 of
QREs.
(d) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or after October 23, 2024.
[[Page 84753]]
Sec. 1.48D-2 Definitions.
(a) In general. The definitions in paragraphs (b) through (o) of
this section apply for purposes of sections 48D and 50 of the Code and
Sec. 1.48D-1, this section and Sec. Sec. 1.48D-3 through 1.48D-6 and
1.50-2 (the section 48D regulations).
(b) Applicable transaction. The term applicable transaction has the
meaning provided in section 50(a)(6) and Sec. 1.50-2.
(c) Basis--(1) In general. With respect to any qualified property,
the term basis has the same meaning as provided in Sec. 1.46-3(c).
Thus, the basis of the qualified property generally is determined in
accordance with the general rules of subtitle A for determining the
basis of property (see subtitle A, subchapter O, part II of the Code).
As such, the basis of qualified property would generally be the cost of
that qualified property (see section 1012 of the Code) unreduced by any
adjustments to basis and would include all items properly included by
the taxpayer in the depreciable basis of the qualified property.
(2) Transition rule. For property the construction of which began
prior to January 1, 2023, and is placed in service after December 31,
2022, the portion of the basis of such property attributable to
construction, reconstruction, or erection after August 9, 2022, must be
allocated using any reasonable method, including by applying the
principles of section 461 of the Code. Rules similar to the rules in
Sec. Sec. 1.48-2(b)(2), 1.48-11(b)(5)(i), and 1.48-12(c)(1) are
applicable.
(d) Beginning of construction. The term beginning of construction
has the meaning provided in Sec. 1.48D-5.
(e) Eligible taxpayer. The term eligible taxpayer means any
taxpayer that--
(1) Is not a foreign entity of concern; and
(2) Has not made an applicable transaction during the taxable year.
(f) Foreign entities--(1) Foreign entity. The term foreign entity
has the same meaning as provided in 15 CFR 231.103.
(2) Foreign entity of concern. The term foreign entity of concern
has the same meaning as provided in 15 CFR 231.104.
(g) Manufacturing of semiconductors. The term manufacturing of
semiconductors and the term semiconductor manufacturing are synonymous.
(h) Manufacturing of semiconductor manufacturing equipment. The
term manufacturing of semiconductor manufacturing equipment means the
physical production (in a manufacturing facility) of semiconductor
manufacturing equipment, which is used by an advanced manufacturing
facility engaged in the manufacturing of semiconductors as defined in
paragraph (g) of this section.
(i) Placed in service. The term placed in service has the same
meaning as provided in Sec. 1.46-3(d).
(j) Qualified investment--(1) In general. Except as provided in
paragraph (j)(2) and (3) of this section, the term qualified investment
with respect to an advanced manufacturing facility means, for any
taxable year, the basis of any qualified property that is part of an
advanced manufacturing facility and placed in service by the taxpayer
during the taxable year.
(2) Special rules for certain passthrough entities. In the case of
any qualified property that is part of an advanced manufacturing
facility of an eligible taxpayer and placed in service by an entity
described in paragraphs (j)(2)(i) through (iii) of this section during
a taxable year, the rules of this paragraph (j)(2) apply to determine
the qualified investment for the taxable year with respect to the
advanced manufacturing facility.
(i) Partnership. In the case of a partnership that places in
service qualified property that is part of an advanced manufacturing
facility of an eligible taxpayer, each partner in the partnership must
take into account separately the partner's share of the basis of the
qualified property placed in service by the partnership during the
taxable year as provided in Sec. 1.46-3(f).
(ii) S corporation. The basis of qualified property that is part of
an advanced manufacturing facility of an eligible taxpayer and placed
in service during the taxable year by an S corporation (as defined in
section 1361(a) of the Code) must be apportioned pro rata among the S
corporation's shareholders on the last day of the S corporation's
taxable year as provided in section 1366.
(iii) Estate or trust. The basis of qualified property that is part
of an advanced manufacturing facility of an eligible taxpayer and
placed in service during the taxable year by an estate or trust must be
apportioned among the estate or trust and its beneficiaries on the
basis of the income of the estate or trust allocable to each for that
taxable year.
(3) Qualified progress expenditures election--(i) In general. A
taxpayer may elect, as provided in Sec. 1.46-5, to increase the
qualified investment with respect to any advanced manufacturing
facility of an eligible taxpayer for the taxable year, by any qualified
progress expenditures made after August 9, 2022.
(ii) Special rules for certain passthrough entities.
Notwithstanding the provisions of Sec. 1.46-5, relating to elections
of progress expenditure property being constructed by or for a
partnership or S corporation, the rules of Sec. 1.46-5(o)(1) and (p)
do not apply to prohibit a partnership or S corporation from making a
progress expenditure election under Sec. 1.46-5 with respect to
qualified property if the partnership or S corporation intends to make
an elective payment election under section 48D(d) and Sec. 1.48D-6
with respect to a section 48D credit determined with respect to such
qualified property.
(4) Examples. The provisions of this paragraph (j) are illustrated
by the following examples.
(i) Example 1: Advanced manufacturing investment credit:
qualified investment in general. On November 1, 2024, X, a calendar-
year C corporation, places in service qualified property with a
basis of $200,000, and on December 1, 2024, X places in service
qualified property with a basis of $300,000. X's qualified
investment for the taxable year is $500,000 ($200,000 + $300,000).
(ii) Example 2: Advanced manufacturing investment credit:
qualified investment for partnerships. A, B, C, and D, all calendar-
year C corporations, are partners in the ABCD partnership. Partners
A, B, C, and D share partnership profits equally. On November 1,
2024, the ABCD partnership placed in service qualified property with
a basis of $1 million. Each partner's share of the basis of the
qualified property, as determined in Sec. 1.46-3(f)(2), is $250,000
($1m x 0.25) and each partner's qualified investment is $250,000.
(k) Section 48D credit. The term section 48D credit means the
advanced manufacturing investment credit determined under section 48D
and the section 48D regulations.
(l) Section 48D regulations. The term section 48D regulations means
Sec. Sec. 1.48D-1 through 1.48D-6 and 1.50-2.
(m) Semiconductor. The term semiconductor means, consistent with 15
CFR 231.115, an integrated electronic device or system most commonly
manufactured using materials such as, but not limited to, silicon,
silicon carbide, or III-V compounds, and processes such as, but not
limited to, lithography, deposition, and etching. Such devices and
systems include, but are not limited to, analog and digital
electronics, power electronics, and photonics, for memory, processing,
sensing, actuation, and communications applications.
(n) Semiconductor manufacturing. The term semiconductor
manufacturing and the term manufacturing of semiconductors are
synonymous and mean, consistent with 15 CFR 231.116, semiconductor
wafer production, semiconductor fabrication, or semiconductor
packaging. The following terms have the following
[[Page 84754]]
meanings in connection with semiconductor wafer production,
semiconductor fabrication, and semiconductor packaging for purposes of
section 48D and the section 48D regulations:
(1) Semiconductor wafer production includes the processes of
growing single-crystal ingots and boules, wafer slicing, etching and
polishing, bonding, cleaning, epitaxial deposition, and metrology.
(2) Semiconductor fabrication includes the process of forming
devices such as transistors, poly capacitors, non-metal resistors, and
diodes, as well as interconnects between such devices, on a wafer of
semiconductor material.
(3) Semiconductor packaging means the process of enclosing a
semiconductor in a protective container (package) and providing
external power and signal connectivity for the assembled integrated
circuit and includes the process of assembly and testing of
semiconductors and advanced packaging of semiconductors.
(4) Assembly includes, but is not limited to, wafer-dicing, die-
bonding, wire bonding, solder bumping, and encapsulation.
(5) Testing includes, but is not limited to, probing, screening,
and burn-in work.
(6) Advanced packaging means a subset of packaging technologies
that uses novel techniques and materials to increase the performance,
power, modularity, and/or durability of an integrated circuit. Advanced
packaging technologies include flip-chip, 2D, 2.5D, and 3D stacking,
fan-out and fan-in, and embedded die/system-in-package (SiP).
(o) Semiconductor manufacturing equipment. The term semiconductor
manufacturing equipment means the highly engineered and specialized
equipment used in the manufacturing of semiconductors as defined in
paragraph (g) of this section and the subsystems that enable or are
incorporated into the manufacturing equipment. Specific examples of
semiconductor manufacturing equipment and subsystems that enable
semiconductor manufacturing equipment include but are not limited to:
(1) Deposition equipment, including, Chemical Vapor Deposition
(CVD), Physical Vapor Deposition (PVD), Electrodeposition, and Atomic
Layer Deposition (ALD);
(2) Etching equipment (wet etch, dry etch);
(3) Equipment for epitaxial growth of transistor features;
(4) Chemical-mechanical polishing equipment to planarize layers
through the semiconductor fabrication process;
(5) Lithography equipment (steppers and scanners of various light
wavelengths, such as deep UV, extreme ultraviolet (EUV), photoresist
coating, and developer tracks);
(6) Equipment for producing ingots and boules, wafer growth
equipment, wafer slicing equipment, wafer dicing equipment, and wire
bonders;
(7) Inspection and measuring equipment, including scanning electron
microscopes, atomic force microscopes, optical inspection systems,
wafer probes and optical scatterometer, EDS (Energy Dispersive
Spectroscopy);
(8) Certain metrology and inspection systems to measure critical
dimensions of the integrated circuit features throughout the
fabrication process, detection and measurement of defects on the wafers
during the fabrication process;
(9) Ion implantation and diffusion/oxidation furnaces;
(10) Specialty glass components including EUV mirrors and optical
pathways, lenses and mirrors used in inspection equipment and other
fabrication processes, and lens assemblies for wafer defect inspection;
(11) Electrostatic chucks;
(12) High performance pumps;
(13) High purity quartz devices;
(14) Ultra-high vacuum chamber components; and
(15) Photomasks and light sources used in photolithography.
(p) Statutory references--(1) Chapter 1. The term chapter 1 means
chapter 1 of the Code.
(2) Code. The term Code means the Internal Revenue Code.
(3) Subtitle A. The term subtitle A means subtitle A of the Code.
(q) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or after October 23, 2024.
Sec. 1.48D-3 Qualified property.
(a) In general. This section provides definitions and rules
relating to qualified property for purposes of section 48D of the Code
and the section 48D regulations.
(b) Qualified property. The term qualified property means tangible
depreciable property that is part of, and integral to, the operation of
an advanced manufacturing facility and that is either--
(1) Constructed, reconstructed, or erected by the taxpayer; or
(2) Acquired by the taxpayer if the original use of such property
commences with the taxpayer.
(c) Tangible depreciable property--(1) In general. The term
tangible depreciable property means tangible personal property (as
defined in Sec. 1.48-1(c)), other tangible property (as defined in
Sec. 1.48-1(d)), and building and structural components (as defined in
Sec. 1.48-1(e), except as provided in paragraphs (c)(2) and (3) of
this section) with respect to which depreciation (or amortization in
lieu of depreciation) is allowable. The law of a State or local
jurisdiction is not controlling for purposes of determining whether
property is tangible property for purposes of section 48D or the
section 48D regulations.
(2) Exception. Pursuant to section 48D(b)(2)(B)(ii), except as
provided in paragraph (c)(3) of this section, the term tangible
depreciable property does not include a building and its structural
components, or a portion thereof, used for--
(i) Offices;
(ii) Administrative services such as human resources or personnel
services, payroll services, legal and accounting services, and
procurement services;
(iii) Sales or distribution functions;
(iv) Security services (not including cybersecurity operations); or
(v) Any other functions unrelated to manufacturing of
semiconductors or semiconductor manufacturing equipment.
(3) Buildings or portions of a building not excluded by section
48D(b)(2)(B)(ii). Buildings or portions of a building not treated as
offices and that are considered related to manufacturing of
semiconductors or semiconductor manufacturing equipment include
buildings or portions of a building used for:
(i) Gowning to enter to and from a cleanroom environment;
(ii) Monitoring operations and remote access of equipment;
(iii) Functions performed by unit process engineers including
developing, monitoring, updating and overseeing individual process
recipes running on every tool in the facility to manufacture, measure
and test wafers including access to relevant data, data analysis,
modifications and updates to the process recipes on the tools;
(iv) Functions performed by equipment engineers including
overseeing tools to ensure proper operation by accessing data about the
tool health and performance remotely adjusting the tool at
workstations, and issuing work orders to the equipment and maintenance
technicians from the workstations;
(v) Functions performed by test engineers including monitoring the
electrical test data being collected from
[[Page 84755]]
the wafers at certain points in their processing;
(vi) Functions performed by yield and defect engineers including
reviewing inspection data collected from wafers;
(vii) Functions performed by metrology engineers including
reviewing physical measurement data collected from the wafers;
(viii) Functions performed by integration engineers that are
responsible for the technology node and the end-to-end wafer process;
(ix) Functions performed by facilities engineers including
monitoring and controlling facilities systems; and
(x) Functions related to central utilities buildings, material
handling and ultrapure water generation facilities, and computing (data
center).
(d) Constructed, reconstructed, or erected by the taxpayer.
Property is considered constructed, reconstructed, or erected by the
taxpayer if the work is done for the benefit of the taxpayer in
accordance with the taxpayer's specifications.
(e) Original use--(1) In general. Except as provided in paragraph
(e)(2) of this section, the term original use means with respect to any
property the first use to which the property is put by any taxpayer in
connection with a trade or business or for the production of income.
Additional capital expenditures paid or incurred by a taxpayer to
recondition or rebuild property acquired or owned by the taxpayer
satisfy the original use requirement to the extent of the expenditures
paid or incurred by a taxpayer. However, a taxpayer's cost to acquire
property reconditioned or rebuilt by another taxpayer does not satisfy
the original use requirement. Whether property is reconditioned or
rebuilt property will be determined based on the facts and
circumstances.
(2) Treatment of inventory. For purposes of paragraph (e)(1) of
this section, if a taxpayer initially acquires new property and holds
the property primarily for sale to customers in the ordinary course of
the taxpayer's trade or business and subsequently withdraws the
property from inventory and uses the property primarily in the
taxpayer's trade or business or primarily for the taxpayer's production
of income, the taxpayer is considered the original user of the
property. If a person initially acquires new property and holds the
property primarily for sale to customers in the ordinary course of the
person's business and a taxpayer subsequently acquires the property
from the person for use primarily in the taxpayer's trade or business
or primarily for the taxpayer's production of income, the taxpayer is
considered the original user of the property. For purposes of this
paragraph (e), the original use of the property by the taxpayer
commences on the date on which the taxpayer first uses the property
primarily in the taxpayer's trade or business or primarily for the
taxpayer's production of income.
(f) Part of an advanced manufacturing facility--(1) In general. To
qualify for the section 48D credit, property must be part of the
advanced manufacturing facility, as provided in this paragraph (f).
Property is part of an advanced manufacturing facility if the property
is physically located or co-located either at the advanced
manufacturing facility, or on a contiguous piece of land to the
advanced manufacturing facility. Parcels or tracts of land will be
considered contiguous if they possess common boundaries, and would be
contiguous but for the interposition of a road, street, railroad,
public utility, stream or similar property.
(2) Property that is not located or co-located at an advanced
manufacturing facility or on a contiguous piece of land to the advanced
manufacturing facility. Property that is not located or co-located at
an advanced manufacturing facility or on a contiguous piece of land to
the advanced manufacturing facility may be considered part of the
advanced manufacturing facility if the property is owned by the same
taxpayer as the entire advanced manufacturing facility, connected to
the advanced manufacturing facility (e.g., via pipeline) and the sole
purpose, function, and output of the property is dedicated to the
operation of the advanced manufacturing facility.
(g) Integral to the operation of an advanced manufacturing
facility--(1) In general. To qualify for the section 48D credit,
property must be integral to the operation of manufacturing of
semiconductors or manufacturing of semiconductor manufacturing
equipment, both as provided in Sec. 1.48D-2. Property is integral to
the operation of manufacturing of semiconductors or manufacturing of
semiconductor manufacturing equipment if such property is used directly
in the manufacturing operation, is essential to the completeness of the
manufacturing operation, and is not transformed in any material way as
a result of the manufacturing operation. Materials, supplies, and other
inventoriable items of property that are transformed during the
manufacturing of semiconductors or into a unit of semiconductor
manufacturing equipment are not considered property integral to the
operation of an advanced manufacturing facility. For this purpose, the
term transform does not include the normal degradation of components of
semiconductor manufacturing equipment. In addition, property such as
pavements, parking areas, inherently permanent advertising displays, or
inherently permanent outdoor lighting facilities, although used in the
operation of a business, ordinarily are not integral to the operation
of an advanced manufacturing facility. Thus, for example, all property
used by the taxpayer to acquire or transport materials or supplies to
the point where the actual manufacturing activity commences (such as
docks, railroad tracks, and bridges), or all property (other than
materials or supplies) used by the taxpayer during the manufacturing of
semiconductors or during the manufacturing of semiconductor
manufacturing equipment within the meaning of Sec. 1.48D-2, would be
considered property integral to the operation of an advanced
manufacturing facility of an eligible taxpayer. Property is considered
integral to the operation of an advanced manufacturing facility of an
eligible taxpayer if so used either by the owner of the property or by
a lessee of the property.
(2) Vertically integrated manufacturers. If an advanced
manufacturing facility that is engaged in the manufacturing of
semiconductors within the meaning of Sec. 1.48D-2 also conducts
vertically integrated activities (for example, producing raw materials
and manufacturing, ingots, wafers, and semiconductors), then property
integral to the operation of such an advanced manufacturing facility
includes only the property used in the manufacturing of semiconductors
within the meaning of Sec. 1.48D-2.
(3) Specific examples of integral property. Specific examples of
property that normally would be integral to the operation of the
advanced manufacturing facility of an eligible taxpayer are:
(i) Equipment and tools used in the processes of Chemical Vapor
Deposition (CVD), and Physical Vapor Deposition (PVD), Atomic Layer
deposition (ALD), oxidation, annealing, and epitaxy. Such equipment
includes Deposition and thin-film growth equipment, etching equipment,
and lithography equipment (including Extreme Ultraviolet Lithography
(EUV));
(ii) Wet process tools, analytical tools, E-Beam operation tools
(to repair masks), mask manufacturing equipment, chemical mechanical
polishing equipment, reticle handlers, and stockers;
(iii) Inspection and metrology equipment, including scanning
electron
[[Page 84756]]
microscopes, atomic force microscopes, ion milling tools, optical
inspection systems, wafer probes and optical scatterometer;
(iv) Clean room facilities, including locker and gowning rooms,
specialized lighting systems, automated material systems for wafer
handling, specialized recirculating air handlers, to maintain the
cleanroom free from particles, control temperature and humidity levels,
and specialized ceilings comprised of HEPA filters;
(v) Cleanroom equipment (including jogs, hand tools, calibration
equipment, and temperature pollution monitoring tools) and specialty
cleaning equipment;
(vi) Electrical power facilities, cooling facilities, chemical
supply systems, and wastewater and wastewater treatment systems,
including water management, water conservation, and water treatment
equipment, materials and technologies;
(vii) Electricity distribution equipment including connectors,
capacitors, meters and sockets, switchgear, surge arresters and
transformers;
(viii) Sub-fab levels containing pumps, transformers, abatement
systems, ultrapure water systems, uninterruptible power supply, and
boilers, pipes, storage systems, wafer routing systems and databases,
backup systems, quality assurance equipment, and computer data centers;
(ix) Utility level equipment including chillers, systems to handle
nitrogen, argon, and other gases, compressor systems, and pipes;
(x) Industrial automation and control equipment (including, but not
limited to, programmable logic controllers, process controllers,
distributed control systems, human machine interface and motor controls
and accessories);
(xi) Industrial automation communications devices, networks, and
software for industrial automation control products and systems
including automated material handling systems (AMHS) and advance wafer
routing software systems and databases;
(xii) Tooling equipment;
(xiii) Back-end manufacturing equipment related to assembly,
testing, and packaging;
(xiv) Photolithography tools;
(xv) Photomasks, reticles, pellicle, steppers, scanners, and
photoresist related equipment;
(xvi) Emulation tools;
(xvii) Rapid thermal processing tools (annealing tubs and vacuum
ovens), melting laser annealing (MLA) equipment, wafer bonding
equipment, physical removal processing tools (flycutter DieSaw and
backgrind), and edge seal dispense;
(xviii) Site infrastructure including but limited to energy, water,
natural gas, backup power generators, transformers, stormwater
management and fire protection;
(xix) Equipment and installation (wipe-film evaporators);
(xx) Chemical and gas delivery systems (piping, storage, and waste
systems including hazardous waste);
(xxi) Bulk chemical purification systems (Liquid N2, Ar, H2, etc.);
(xxii) HVAC air conditioning and air handling systems, critical
cooling water systems and heating systems;
(xxiii) Wafer stockers with temperature and air quality control;
(xxiv) Temperature control systems;
(xxv) Security and monitoring system and devices;
(xxvi) Failure analysis labs and equipment;
(xxvii) Quality assurance equipment including incoming goods, in-
process inspection, and finished-good inspection;
(xxviii) Transportation, trolleys and carts that are used to
transport wafers or overhead conveyer systems to move the carts;
(xxxix) Lighting products;
(xxx) Industrial gas generation and/or handling systems, such as
air separation units, including any associated backup and storage
equipment;
(xxxi) Input shaping tooling;
(xxxii) Crystal formation and coating equipment;
(xxxiii) Mechanical equipment; and
(xxxiv) Polishing equipment.
(4) Research or storage facilities. If property, including a
building and its structural components, constitutes a research or
storage facility and is used in connection with the manufacturing of
semiconductors or manufacturing of semiconductor manufacturing
equipment, the property may qualify as integral to the operation of the
advanced manufacturing facility under section 48D(b)(2)(A)(iv).
Specific examples of research facilities include research facilities
that manufacture semiconductors in connection with research, such as
pre-pilot production lines and prototypes, including semiconductor
packaging. Specific examples of storage facilities are mineral or
chemical storage equipment, gas storage tanks, including high pressure
cylinders or specially designed tanks and drums, wastewater storage,
and inventory and finished goods warehouses. A research facility that
does not manufacture any type of semiconductor, as provided in Sec.
1.48D-2(m), or semiconductor manufacturing equipment, as provided in
Sec. 1.48D-2(o), does not qualify.
(5) Examples. The following examples illustrate the rules of this
paragraph (g):
(i) Example 1. X Corp, a calendar-year C corporation, is a
manufacturer of air separation units that are designed to supply on
demand nitrogen to an advanced manufacturing facility. In January
2025, X Corp places in service an air separation unit that is co-
located at an advanced manufacturing facility on a contiguous piece
of land to the advanced manufacturing facility. The air separation
unit produces nitrogen on demand, and the nitrogen is used directly
in the manufacturing of semiconductors. The air separation unit is
part of the advanced manufacturing facility within the meaning of
paragraph (f) of this section because the air separation unit is
located on a contiguous piece of land to the advanced manufacturing
facility. The air separation unit is property integral to the
operation of an advanced manufacturing facility under this paragraph
(g) because it is used directly in, and is essential to, the
completeness of the semiconductor manufacturing operation, and is
not transformed in any material way as a result of the semiconductor
manufacturing operation.
(ii) Example 2. Y Corp, a calendar-year C corporation, is a
manufacturer of specialty chemicals that are used in the
manufacturing of semiconductors. In 2025, Y Corp places in service
equipment at its facility that manufactures the specialty chemicals.
The equipment is located five miles from the advanced manufacturing
facility, but is not part of the advanced manufacturing facility
within the meaning of paragraph (f) of this section because it is
not located or co-located at the advanced manufacturing facility, or
on a contiguous piece of land to the advanced manufacturing
facility, and it is not connected to the advanced manufacturing
facility. Also in 2025, Y Corp places in service chemical storage
tanks that are part of the advanced manufacturing facility within
the meaning of paragraph (f) of this section because the property is
located on a contiguous piece of land to the advanced manufacturing
facility. The chemical storage tanks are property integral to the
operation of the advanced manufacturing facility pursuant to
paragraph (g) of this section.
(h) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or after October 23, 2024.
Sec. 1.48D-4 Advanced manufacturing facility of an eligible
taxpayer.
(a) In general. This section provides definitions and rules
relating to advanced manufacturing facilities of eligible taxpayers for
purposes of section 48D of the Code and the section 48D regulations.
(b) Advanced manufacturing facility. For purposes of section
48D(b)(3) and this section, the term advanced manufacturing facility
means a facility of an eligible taxpayer for which the
[[Page 84757]]
primary purpose, as determined under paragraph (c)(1) of this section,
is the manufacturing of semiconductors or the manufacturing of
semiconductor manufacturing equipment within the meaning of Sec.
1.48D-2.
(c) Primary purpose--(1) In general. The determination of the
primary purpose of a facility will be made based on all the facts and
circumstances surrounding the construction, reconstruction, or erection
of the advanced manufacturing facility of an eligible taxpayer. Facts
that may indicate a facility has a primary purpose of manufacturing of
semiconductors or manufacturing of semiconductor manufacturing
equipment include plans or other documents for the facility that
demonstrate that the facility is designed for the manufacturing of
semiconductors or manufacturing of semiconductor manufacturing
equipment within the meaning of Sec. 1.48D-2. Facts may also include
the possession of permits or licenses needed for the manufacturing of
semiconductors or manufacturing of semiconductor manufacturing
equipment; and executed contracts to a customer to supply such
semiconductors or executed contracts to an advanced manufacturing
facility as defined in paragraph (b) of this section to supply such
semiconductor manufacturing equipment in place either before or within
6 months after the facility is placed in service. A facility has the
primary purpose of manufacturing of semiconductors or manufacturing of
semiconductor manufacturing equipment if more than 50 percent of its
potential output, as measured by cost to produce, revenue received in
an arm's length transaction, or units produced, constitutes
manufacturing of semiconductors or manufacturing of semiconductor
manufacturing equipment within the meaning of Sec. 1.48D-2. However,
property placed in service in a taxable year must still meet the
definition of qualified property under section 48D(b)(2) and Sec.
1.48D-3 for its basis to be included as part of the qualified
investment in the advanced manufacturing facility eligible for the
section 48D credit. For example, property that is not integral to the
operation of an advanced manufacturing facility as provided in Sec.
1.48D-3(g) may not be included as a qualified investment in an advanced
manufacturing facility.
(2) No primary purpose. A facility for which the primary purpose is
the manufacturing, producing, growing, or extracting of materials or
chemicals that are supplied to an advanced manufacturing facility is
not a facility for which the primary purpose is the manufacturing of
semiconductors or manufacturing of semiconductor manufacturing
equipment. Thus, for example, facilities that exclusively produce
semiconductor-grade polysilicon, or produce gases, or that manufacture
components or parts, to supply to an advanced manufacturing facility
engaged in the manufacturing of semiconductors or manufacturing of
semiconductor manufacturing equipment are not facilities for which the
primary purpose is the manufacturing of semiconductors or the
manufacturing of semiconductor manufacturing equipment.
(3) Examples. The following examples illustrate the rules of this
paragraph (c):
(i) Example 1: Primary purpose; in general. In January 2025, X
Corp, a calendar-year C corporation, begins construction of a
facility that will manufacture semiconductor manufacturing equipment
that could be used in a facility that will engage in semiconductor
fabrication (semiconductor fabrication facility). A portion of the
equipment produced, however, could be used for manufacturing
operations of a facility that is not engaged in semiconductor
manufacturing. X Corp enters into a contract with Y Corp, which is
building a semiconductor fabrication facility to be placed in
service in July 2026, to supply Y Corp with equipment that is
integral to semiconductor fabrication. Such equipment represents
more than 50 percent of the potential output of X Corp's facility
(by cost to produce such equipment) of X Corp's facility for the
first year of operations. X Corp's facility will be considered as
having a primary purpose of manufacturing of semiconductor
manufacturing equipment for the first year of its operations.
(ii) Example 2: Primary purpose; semiconductor wafer production.
X Corp, a calendar-year C corporation, is engaged in the production
of solar wafers (that is, X Corp is engaged in semiconductor wafer
production). In January 2025, X Corp receives the necessary permits
to begin construction of a facility designed for semiconductor wafer
production within the meaning of Sec. 1.48D-2. X Corp enters into a
contract to supply such wafers to an unrelated person. Such contract
represents more than 50 percent of X Corp's potential output (by
revenue received) for the tax year that the facility is placed in
service. Because the contract to sell wafers represents more than 50
percent of X Corp's potential output (by revenue received), X Corp's
facility will be considered as having a primary purpose of
semiconductor wafer production within the meaning of paragraph
(c)(1) of this section.
(iii) Example 3: Primary purpose; vertically integrated
manufacturer. Z Corp, a C corporation, is a vertically integrated
manufacturer. In January 2025, Z Corp begins construction of a
facility that will produce raw materials and other consumables for
use in the manufacturing of semiconductors and such facility will
also engage in semiconductor wafer production and semiconductor
fabrication. Z Corp enters into separate sales contracts to sell
units produced from the semiconductor fabrication with a variety of
unrelated companies that are engaged in semiconductor packaging. Z
Corp also enters into a sales contract with A Corp to sell raw
materials that it produces at the facility to A Corp. Z Corp's
production of units from its semiconductor fabrication sold to
companies engaged in semiconductor packaging represents more than 50
percent of the potential output (by cost) of Z Corp's facility for
the first year of operations; therefore, Z Corp's facility will be
considered as having a primary purpose of manufacturing of
semiconductors.
(iv) Example 4: No primary purpose; vertically integrated
manufacturer. Assume the same facts as in paragraph (c)(3)(iii) of
this section (Example 3), except that Z Corp's production of such
raw materials represents more than 50 percent of the potential
output of Z Corp's facility for the first year of operations. Z
Corp's facility will not be considered as having a primary purpose
of manufacturing of semiconductors.
(d) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or October 23, 2024.
Sec. 1.48D-5 Beginning of construction.
(a) Termination of credit--(1) In general. The credit allowed under
section 48D of the Code and the section 48D regulations does not apply
to property that is part of an advanced manufacturing facility of an
eligible taxpayer if the beginning of construction of the property, as
defined in paragraph (a)(2) of this section, begins after December 31,
2026 (the date specified in section 48D(e)).
(2) Property. For purposes of determining beginning of construction
of property under this section, the unit of property is--
(i) A single advanced manufacturing facility project as described
in paragraph (a)(3) of this section; or
(ii) An item of qualified property (as defined in Sec. 1.48D-
3(b)).
(3) Single advanced manufacturing facility project--(i) In general.
Solely for purposes of determining whether construction of a qualified
property has begun for purposes of section 48D and the section 48D
regulations, multiple items of qualified property or advanced
manufacturing facilities that are operated as part of a single advanced
manufacturing facility project (along with any items of property, such
as clean rooms, chemical delivery systems, chemical storage facilities,
temperature control systems, robotic handling systems, semiconductor
manufacturing equipment, and tooling equipment (such as for deposition
and etching) that
[[Page 84758]]
are integral to the operation of the single advanced manufacturing
facility project) will be treated as a single item of qualified
property. Multiple qualified properties or advanced manufacturing
facilities will be treated as operated as part of a single advanced
manufacturing facility project, if at any point during construction of
the multiple qualified properties or advanced manufacturing facilities,
they are owned by a single taxpayer (subject to the related taxpayer
rule provided in paragraph (a)(3)(ii) of this section) and any two or
more of the following factors are present--
(A) The properties or facilities are owned by a single legal
entity;
(B) The properties or facilities are constructed on contiguous
pieces of land;
(C) The properties or facilities are described in a common supply
contract or other type of relevant contract;
(D) The properties or facilities share a common electricity and/or
water supply;
(E) The properties or facilities are described in one or more
common environmental or other regulatory permits;
(F) The properties or facilities were constructed pursuant to a
single master construction contract; or
(G) The construction of the properties or facilities was financed
pursuant to the same loan agreement or other financing arrangement.
(ii) Related taxpayers--(A) Definition. For purposes of this
section, the term related taxpayers means members of a group of trades
or businesses that are under common control (as defined in Sec. 1.52-
1(b)).
(B) Related taxpayer rule. For purposes of this section, related
taxpayers are treated as one taxpayer in determining whether multiple
qualified properties or advanced manufacturing facilities will be
treated as operated as part of a single advanced manufacturing facility
project.
(iii) Example. A single taxpayer is developing Project C, a project
that will consist of 3 advanced manufacturing facilities constructed on
the same campus. Project C will share a common electricity supply, and
semiconductors manufactured by Project C will be sold to Buyer through
a single supply contract. In 2023, for 1 of the 3 advanced
manufacturing facilities, the taxpayer installs deposition equipment.
Thereafter, the taxpayer completes the construction of all 3 advanced
manufacturing facilities pursuant to a continuous program of
construction. For purposes of the section 48D credit, Project C is a
single advanced manufacturing facility project that will be treated as
a single property, and the taxpayer performed physical work of a
significant nature that constitutes the beginning of construction of
Project C in 2023.
(iv) Timing of single advanced manufacturing facility project
determination. Whether multiple properties or advanced manufacturing
facilities are operated as part of a single advanced manufacturing
facility project and are treated as a single item of property for
purposes of the beginning of construction requirement of section 48D
and the section 48D regulations is determined in the taxable year
during which the last of the multiple properties or facilities is
placed in service.
(v) Disaggregation. Multiple properties or advanced manufacturing
facilities that are operated as part of a single advanced manufacturing
facility project and treated as a single item of qualified property
under this paragraph (a)(3) for purposes of determining whether
construction of a qualified property or advanced manufacturing facility
has begun may be disaggregated and treated as separate items of
qualified property for purposes of determining whether a separate
advanced manufacturing facility or item of qualified property satisfies
the continuity safe harbor (as defined in paragraph (e) of this
section). Those disaggregated separate advanced manufacturing
facilities or items of qualified property that are placed in service
prior to the continuity safe harbor deadline will be eligible for the
continuity safe harbor. The remaining disaggregated separate items of
property or facilities may satisfy the continuity requirement under a
facts and circumstances determination.
(vi) Example. A single taxpayer is developing Project D, a project
that will consist of 4 separate properties. Project D will use the same
water supply and each property within Project D will be constructed
pursuant to a single master construction contract. Under the single
project rule provided in this paragraph (a)(3), Project D is a single
project that will be treated as a single property. In 2024, for 3 of
the 4 separate properties, the taxpayer installs property integral to
the operation of the advanced manufacturing facility. Accordingly, the
taxpayer has performed physical work of a significant nature that
constitutes the beginning of construction of Project D for purposes of
section 48D(e). Thereafter, on the last day of the 10-year continuity
safe harbor period, the taxpayer places in service only 3 of the 4
separate properties within Project D. The taxpayer disaggregates
Project D under paragraph (a)(3)(v) of this section and accordingly,
only 3 of the 4 separate properties satisfy the continuity safe harbor.
For the remaining 1 separate property, the taxpayer may demonstrate
that it satisfies the continuity requirement provided in paragraph (e)
of this section based on the facts and circumstances, to enable the
taxpayer to claim the section 48D credit.
(b) Beginning of construction--(1) In general. For purposes of
section 48D, the section 48D regulations, and section 107(f)(1) of the
CHIPS Act of 2022, Public Law 117-167, div. A, 136 Stat. 1366, 1399
(August 9, 2022), a taxpayer may establish that construction of an item
of property (as defined in paragraph (a)(2) of this section) of the
taxpayer begins under either:
(i) The physical work test of paragraph (c) of this section; or
(ii) The five percent safe harbor of paragraph (d) of this section.
(2) Continuity requirement. See paragraph (e) of this section for
the continuity requirement applicable for purposes of the physical work
test and the five percent safe harbor, which must be demonstrated
either by maintaining continuous construction (as defined in paragraph
(e)(2) of this section) or continuous efforts (as defined in paragraph
(e)(3) of this section).
(c) Physical work test--(1) In general. Under the physical work
test, construction of an item of property begins when physical work of
a significant nature begins, provided thereafter that the taxpayer
maintains continuous construction or continuous efforts. This test
focuses on nature of the work performed, not the amount of the costs.
Assuming the work performed is of a significant nature, there is no
fixed minimum amount of work, monetary or percentage threshold required
to satisfy the physical work test.
(2) Physical work of significant nature--(i) In general. Work
performed by the taxpayer and work performed for the taxpayer by other
persons under a binding written contract that is entered into prior to
the manufacture, construction, or production of the property for use by
the taxpayer in the taxpayer's trade or business of manufacturing
semiconductors or semiconductor manufacturing equipment is taken into
account in determining whether physical work of a significant nature
has begun. Both on-site and off-site work (performed either by the
taxpayer or by another person under a binding written contract) may be
taken into account for purposes of demonstrating that physical work of
a significant nature has begun. A written contract is binding only if
it is enforceable under local law against the
[[Page 84759]]
taxpayer or a predecessor and does not limit damages to a specified
amount (for example, by use of a liquidated damages provision). For
this purpose, a contractual provision that limits damages to an amount
equal to at least five percent of the total contract price will not be
treated as limiting damages to a specified amount. For additional
guidance regarding the definition of a binding written contract, see
Sec. 1.168(k)-1(b)(4)(ii)(A) through (D). Specific examples of on-site
physical work of a significant nature include the excavation for the
foundation and the pouring of the concrete pads of the foundation.
Specific examples of off-site physical work of a significant nature
include the manufacture of semiconductor manufacturing equipment but
only if the manufacturer's work is done pursuant to a binding written
contract and the semiconductor manufacturing equipment is not held in
the manufacturer's inventory.
(ii) Exceptions. Physical work of significant nature does not
include preliminary activities, including but not limited to planning
or designing, securing financing, exploring, researching, obtaining
permits, licensing, conducting surveys, environmental and engineering
studies, or clearing a site, even if the cost of those preliminary
activities is properly included in the depreciable basis of the
property. Physical work of a significant nature also does not include
work (performed either by the taxpayer or by another person under a
binding written contract) to produce property that is either in
existing inventory or is normally held in inventory by a vendor.
(d) Five percent safe harbor--(1) In general. Construction of a
property will be considered as having begun if:
(i) A taxpayer pays or incurs (within the meaning of Sec. 1.461-
1(a)(1) and (2)) five percent or more of the total cost of the
property; and
(ii) Thereafter, the taxpayer maintains continuous construction or
continuous efforts.
(2) Costs. All costs properly included in the basis of the property
are taken into account to determine whether the five percent safe
harbor has been met. For property that is manufactured, constructed, or
produced for the taxpayer by another person under a binding written
contract with the taxpayer, costs incurred with respect to the property
by the other person before the property is provided to the taxpayer are
deemed incurred by the taxpayer when the costs are incurred by the
other person under the principles of section 461 of the Code.
(3) Cost overruns--(i) Single advanced manufacturing facility
project. If the total cost of a property that is a single advanced
manufacturing facility project comprised of multiple properties (as
described in paragraph (a)(3) of this section) exceeds its anticipated
total cost such that the amount the taxpayer actually paid or incurred
with respect to the single advanced manufacturing facility project to
establish the beginning of its construction under paragraph (b)(1)(ii)
of this section is less than five percent of the total cost at the time
it is placed in service, the five percent safe harbor is not fully
satisfied. However, the five percent safe harbor will be satisfied with
respect to some, but not all, of the separate properties or facilities
(as described in paragraph (a)(3) of this section) comprising the
single advanced manufacturing facility project, as long as the total
aggregate cost of those properties is not more than twenty times
greater than the amount the taxpayer paid or incurred.
(ii) Example. In 2023, taxpayer incurs $300,000 in costs to
construct Project A, comprised of six advanced manufacturing facilities
that will be operated as a single project. Taxpayer anticipates that
each advanced manufacturing facility will cost $1,000,000 for a total
cost for Project A of $6,000,000. Thereafter, the taxpayer makes
continuous efforts to advance towards completion of Project A. The
taxpayer timely places Project A in service in 2025. In 2025, the
actual total cost of Project A amounts to $7,500,000, with each
advanced manufacturing facility costing $1,250,000. Although the
taxpayer did not pay or incur five percent of the actual total cost of
Project A in 2023, the taxpayer will be treated as satisfying the Five
Percent Safe Harbor in 2023 with respect to four of the advanced
manufacturing facilities, as their actual total cost of $5,000,000 is
not more than twenty times greater than the $300,000 in costs incurred
by the taxpayer. The taxpayer will not be treated as satisfying the
five percent safe harbor in 2023 with respect to two of the properties.
Thus, the taxpayer may claim the section 48D credit based on
$5,000,000, the cost of four of the properties.
(iii) Single property. If the total cost of a single property,
which is not part of a single advanced manufacturing facility project
comprised of multiple properties or facilities (as described in
paragraph (a)(3) of this section) and cannot be separated into multiple
properties or facilities, exceeds its anticipated total cost so that
the amount a taxpayer actually paid or incurred with respect to the
single property as of an earlier year is less than five percent of the
total cost of the single property at the time it is placed in service,
then the taxpayer will not satisfy the five percent safe harbor with
respect to any portion of the single property in such earlier year.
(iv) Example. In 2023, a taxpayer incurs $250,000 in costs to
construct Project B, a single property. The taxpayer anticipates that
the total cost of Project B will be $5,000,000. Thereafter, the
taxpayer makes continuous efforts to advance towards completion of
Project B. The taxpayer places Project B in service in a later year. At
that time, its actual total cost amounts to $6,000,000. Because Project
B is a single property that is not a single project comprised of
multiple properties, the taxpayer will not satisfy the five percent
safe harbor as of 2023. However, if the construction of Project B
satisfies the requirements of the physical work test by also beginning
physical work of a significant nature in 2024, the taxpayer may be able
to demonstrate that construction began in 2024.
(e) Continuity requirement--(1) In general. For purposes of the
physical work test and five percent safe harbor, taxpayers must satisfy
the continuity requirement by demonstrating either continuous
construction or continuous efforts regardless of whether the physical
work test or the five percent safe harbor was used to establish the
beginning of construction. Whether a taxpayer meets the continuity
requirement under either test is determined by the relevant facts and
circumstances. The Commissioner will closely scrutinize a property and
may determine that the beginning of construction is not satisfied with
respect to a property if a taxpayer does not meet the continuity
requirement.
(2) Continuous construction. The term continuous construction means
a continuous program of construction that involves continuing physical
work of a significant nature. Whether a taxpayer maintains a continuous
program of construction to satisfy the continuity requirement will be
determined based on all the relevant facts and circumstances.
(3) Continuous efforts. The term continuous efforts means
continuous efforts to advance towards completion of a property to
satisfy the continuity requirement. Whether a taxpayer makes continuous
efforts to advance towards completion of a property will be determined
by the relevant facts and circumstances. Facts and circumstances
indicating continuous efforts to advance towards completion of a
property may include:
[[Page 84760]]
(i) Paying or incurring additional amounts included in the total
cost of the property. A taxpayer is considered to meet this factor for
a taxable year in which it pays or incurs (within the meaning of Sec.
1.461-1(a)(1) and (2)) five percent or more of the total cost of the
property each calendar year after the calendar year during which
construction of the property began for purposes of section 48D and the
section 48D regulations;
(ii) Entering into binding written contracts for the manufacture,
construction, or production of the property or for future work to
construct the property;
(iii) Obtaining necessary permits; and
(iv) Performing physical work of a significant nature.
(4) Excusable disruptions to continuous construction and continuous
efforts tests--(i) In general. Certain disruptions in a taxpayer's
continuous construction or continuous efforts to advance towards
completion of a property that are beyond the taxpayer's control will
not be considered as indicating that a taxpayer has failed to satisfy
the continuity requirement.
(ii) Effect of excusable disruptions on continuity safe harbor. The
excusable disruptions provided in this paragraph (e)(4) will not extend
the continuity safe harbor deadline that is provided in paragraph
(e)(6) of this section.
(iii) Non-exclusive list of construction disruptions. This
paragraph (e)(4)(iii) provides a non-exclusive list of construction
disruptions that will not be considered as indicating that a taxpayer
has failed to satisfy the continuity requirement:
(A) Delays due to severe weather conditions.
(B) Delays due to natural disasters.
(C) Delays in obtaining permits or licenses from Federal, Indian
Tribal, State, territorial, or local governments. Such delays include
delays in obtaining air emissions, water discharge, or hazardous waste
management permits or chemical handling licenses from the Environmental
Protection Agency (EPA) or another environmental protection authority.
Such delays also include delays as a result of the review process under
State, Tribal, local, or Federal environmental laws, for example, a
review under the National Environmental Policy Act, as well as delays
in obtaining construction permits.
(D) Delays at the written request of a Federal, State, local, or
Indian Tribal government regarding matters of public health, public
safety, security, or similar concerns, including hazardous chemical
transport.
(E) Delays related to electrical or water supply, such as those
relating to the completion of construction on a distribution line or
water supply line that may be associated with a project's electrical
and water needs, whether constructed by the eligible taxpayer that is
the owner of the advanced manufacturing facility, a governmental
entity, or another person.
(F) Delays in the manufacture of custom components or equipment.
(G) Delays due to the inability to obtain specialized equipment of
limited availability.
(H) Delays due to supply shortages.
(I) Delays due to the presence of endangered species.
(J) Financing delays.
(K) Delays due to specialized labor shortages or labor stoppages.
(5) Timing of excusable disruption determination. In the case of a
single advanced manufacturing facility project comprised of a single
property, whether an excusable disruption has occurred for purposes of
the beginning of construction requirement of section 48D and the
section 48D regulations must be determined in the taxable year during
which the property is placed in service. In the case of a single
advanced manufacturing facility project comprised of multiple
properties or facilities, whether an excusable disruption has occurred
for purposes of the beginning of construction requirement of section
48D and the section 48D regulations must be determined in the taxable
year during which the last of multiple properties or facilities is
placed in service.
(6) Continuity safe harbor--(i) In general. A taxpayer will be
deemed to satisfy the continuity requirement provided the property is
placed in service no more than 10 calendar years after the calendar
year during which construction of the property began for purposes of
section 48D and the section 48D regulations.
(ii) Example. If construction begins on a property on January 15,
2023, and the property is placed in service by December 31, 2033, the
property will be considered to satisfy the continuity safe harbor. If
the property is not placed in service before January 1, 2034, whether
the continuity requirement was satisfied will be determined based on
all the relevant facts and circumstances.
(f) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or after October 23, 2024.
0
Par. 4. Section 1.50-0 is added to read as follows:
Sec. 1.50-0 Table of contents.
This section lists the table of contents for Sec. Sec. 1.50-1 and
1.50-2.
Sec. 1.50-1 Lessee's income inclusion following election of lessor
of investment credit property to treat lessee as acquirer.
(a) In general.
(b) Coordination with basis adjustment rules.
(1) Basis adjustment.
(2) Amount of credit included ratably in gross income.
(i) In general.
(ii) Special rule for the energy credit.
(3) Special rule for partnerships and S corporations.
(i) In general.
(ii) Definition of ultimate credit claimant.
(c) Coordination with the recapture rules.
(1) In general.
(2) Income inclusion exceeds unrecaptured credit.
(3) Special rule for the energy credit.
(4) Timing of income inclusion or reduction following recapture.
(d) Election to accelerate income inclusion outside of the
recapture period.
(1) In general.
(2) Exceptions.
(3) Manner and time for making election.
(e) Examples.
(1) Example 1.
(2) Example 2.
(3) Example 3.
(4) Example 4.
(5) Example 5.
(6) Example 6.
(f) Applicability date.
Sec. 1.50-2 Recapture of the advanced manufacturing investment
credit in the case of certain expansions.
(a) Recapture in connection with certain expansions.
(1) In general.
(2) Exception.
(3) Carrybacks and carryover adjusted.
(b) Definitions.
(1) Applicable period.
(2) Applicable taxpayer.
(i) In general.
(ii) Special rules for partnerships and S corporations and their
partners and shareholders.
(iii) Examples.
(A) Example 1: Applicable taxpayer: In general.
(B) Example 2: Applicable taxpayer: In general.
(C) Example 3: Applicable taxpayer: Special rules for
partnerships and S corporations and their partners and shareholders.
(D) Example 4: Applicable taxpayer: Special rules for
partnerships and S corporations and their partners and shareholders.
(E) Example 5: Applicable taxpayer: Special rules for
partnerships and S corporations and their partners and shareholders.
(F) Example 6: Applicable taxpayer: Special rules for
partnerships and S corporations and their partners and shareholders.
(iv) Affiliated groups.
(3) Applicable transaction.
[[Page 84761]]
(4) Applicable transaction recapture amount.
(5) Existing facility.
(6) Foreign country of concern.
(7) Material expansion.
(8) Semiconductor manufacturing capacity.
(9) Significant renovations.
(10) Significant transaction.
(i) In general.
(ii) Required agreement.
(11) Technology licensing.
(12) Technology or product that raises national security
concerns.
(c) Exception from the definition of applicable transaction for
the manufacturing of legacy semiconductors.
(1) In general.
(2) Legacy semiconductor.
(d) Example: Applicable transaction credit claimed.
(e) Applicability date.
0
Par. 5. Section 1.50-2 is added to read as follows:
Sec. 1.50-2 Recapture of the advanced manufacturing investment
credit in the case of certain expansions.
(a) Recapture in connection with certain expansions--(1) In
general. Except as provided in section 50(a)(3)(B) of the Code and
paragraph (a)(2) of this section, if an applicable taxpayer engages in
an applicable transaction before the close of the applicable period,
then the tax under chapter 1 for the taxable year in which such
transaction occurs is increased by 100 percent of the applicable
transaction recapture amount. Any taxpayer, including an applicable
taxpayer, that engages in an applicable transaction during a taxable
year does not meet the definition of an eligible taxpayer under section
48D(c) and the section 48D regulations and is ineligible for the
section 48D credit for that taxable year. See paragraph (b) of this
section for definitions of terms used in section 50(a)(3) and this
section.
(2) Exception. Section 50(a)(3)(A) and paragraph (a)(1) of this
section do not apply if the applicable taxpayer demonstrates to the
satisfaction of the Commissioner that the applicable transaction has
been ceased or abandoned within 45 days of a determination and notice
by the Commissioner. A taxpayer that ceases or abandons a particular
applicable transaction for a taxable year may still be treated as
engaging in a different applicable transaction for a taxable year. A
taxpayer may not circumvent the application of section 50(a)(3) and
this section by engaging in a series of applicable transactions,
multiple applicable transactions, or other similar arrangements.
(3) Carrybacks and carryover adjusted. In the case of any cessation
described in section 50(a)(1) or (2), or any applicable transaction to
which section 50(a)(3) and paragraph (a)(1) of this section apply, any
carryback or carryover under section 39 of the Code is appropriately
adjusted by reason of such cessation or applicable transaction.
(b) Definitions. The following definitions apply for purposes of
section 50(a)(3) and this section.
(1) Applicable period. The term applicable period means the 10-year
period beginning on the date that an applicable taxpayer placed in
service property that is eligible for the section 48D credit.
(2) Applicable taxpayer--(i) In general. Except as provided in
paragraph (b)(2)(ii) of this section, the term applicable taxpayer
means any taxpayer who was allowed a section 48D credit or made an
election under section 48D(d)(1) with respect to such credit, for any
taxable year prior to the taxable year in which such taxpayer entered
into an applicable transaction.
(ii) Special rules for partnerships and S corporations and their
partners and shareholders. In the case of qualified property placed in
service by a partnership or an S corporation for which a section 48D
credit was determined, the term applicable taxpayer also means--
(A) The partnership and the partners of such partnership (directly
or indirectly through one or more tiered partnerships) who were allowed
a section 48D credit for such property, or S corporation and the
shareholder(s) of such S corporation who were allowed a section 48D
credit for such property, for any taxable year prior to the taxable
year in which such partnership or S corporation entered into an
applicable transaction;
(B) Any partner in a partnership (directly or indirectly through
one or more tiered partnerships) or any shareholder in an S corporation
with respect to the partner's or S corporation shareholder's share of
any section 48D credit allowed for such property for any taxable year
prior to when such partner or S corporation shareholder entered into an
applicable transaction;
(C) Any partnership or S corporation that made an election under
section 48D(d)(2) with respect to a credit determined under section
48D(a)(1) for any taxable year prior to the taxable year in which such
partnership or S corporation entered into an applicable transaction;
and
(D) Any partner in a partnership (directly or indirectly through
one or more tiered partnerships) or shareholder in an S corporation
with respect to the partner's or S corporation shareholder's share of
any tax-exempt income from the partnership or S corporation that made
an election under section 48D(d)(2) for any taxable year prior to when
such partner or shareholder entered into an applicable transaction.
(iii) Examples. The following examples illustrate the rules of this
paragraph (b)(2).
(A) Example 1: Applicable taxpayer: In general. On July 1, 2026,
X Corp, a calendar-year C corporation, entered into an applicable
transaction. In 2025, X Corp had placed in service qualified
property that is part of an advanced manufacturing facility and was
allowed a section 48D credit for its 2025 taxable year. X Corp is an
applicable taxpayer when it entered into the applicable transaction.
(B) Example 2: Applicable taxpayer: In general. The facts are
the same as in paragraph (b)(2)(iii)(A) of this section (Example 1),
except that X timely filed its 2025 tax return properly making an
election under section 48D(d)(1) with respect to the section 48D
credit. X Corp is an applicable taxpayer when it entered into the
applicable transaction.
(C) Example 3: Applicable taxpayer: Special rules for
partnerships and S corporations and their partners and shareholders.
A, B, C, and D, all calendar-year C corporations, are partners in
the ABCD partnership. Partners A, B, C, and D share partnership
profits equally. On May 1, 2027, the ABCD partnership engages in an
applicable transaction. On November 1, 2025, the ABCD partnership
had placed in service qualified property with a basis of $1 million.
Each partner's share of the basis of the qualified property, as
determined in Sec. 1.46-3(f)(2), is $250,000 ($1m x 0.25) and each
partner's qualified investment is $250,000. A, B, C, and D each
filed its 2025 tax return claiming a section 48D credit. The ABCD
partnership and A, B, C, and D each are an applicable taxpayer when
ABCD partnership enters into the applicable transaction.
(D) Example 4: Applicable taxpayer: Special rules for
partnerships and S corporations and their partners and shareholders.
The facts are the same as in paragraph (b)(2)(iii)(C) of this
section (Example 3), except that on May 1, 2027, A, and not ABCD
partnership, engages in an applicable transaction. A is an
applicable taxpayer with respect to A's share of the section 48D
credit when A enters into the applicable transaction. Neither the
ABCD partnership nor partners B, C, nor D are an applicable taxpayer
with respect to the applicable transaction entered into by A.
(E) Example 5: Applicable taxpayer: Special rules for
partnerships and S corporations and their partners and shareholders.
The facts are the same as in paragraph (b)(2)(iii)(C) of this
section (Example 3), except that A, B, C and D do not claim a
section 48D credit on their timely filed 2025 tax returns. Instead,
the ABCD partnership makes an election pursuant to section 48D(d)(2)
with respect to the section 48D credit determined under section
48D(a)(1). The ABCD partnership is an applicable taxpayer with
respect to the elective payment to the ABCD partnership pursuant to
section 48D(d)(2)(A)(i)(I).
[[Page 84762]]
(F) Example 6: Applicable taxpayer: Special rules for
partnerships and S corporations and their partners and shareholders.
The facts are the same as in paragraph (b)(2)(iii)(E) of this
section (Example 5), except that the ABCD partnership did not engage
in an applicable transaction. On May 1, 2027, A engages in an
applicable transaction. A is an applicable taxpayer with respect to
its share of tax-exempt income allocated to A pursuant to section
48D(d)(2)(A)(i)(II) and (IV). Neither the ABCD partnership nor
partners B, C, or D are an applicable taxpayer with respect to the
applicable transaction entered into by A.
(iv) Affiliated groups. For purposes of this paragraph (b)(2), all
members of an affiliated group under section 1504(a) of the Code,
determined without regard to section 1504(b)(3), are treated as one
taxpayer.
(3) Applicable transaction. Except as provided in section
50(a)(6)(D)(ii) and paragraph (c)(1) of this section, the term
applicable transaction means, with respect to any applicable taxpayer,
any significant transaction involving the material expansion of
semiconductor manufacturing capacity of such applicable taxpayer in any
foreign country of concern.
(4) Applicable transaction recapture amount. The term applicable
transaction recapture amount means, with respect to an applicable
taxpayer, the aggregate decrease in the credits allowed under section
38 of the Code for all prior taxable years that would have resulted
solely from reducing to zero any credit determined under section 46 of
the Code that is attributable to the advanced manufacturing investment
credit under section 48D(a), with respect to property that has been
placed in service during the applicable period.
(5) Existing facility. The term existing facility means any
facility built, equipped, and operating prior to a taxpayer placing in
service qualified property as defined in section 48D(b)(2) and Sec.
1.48D-3. Existing facilities are defined by their semiconductor
manufacturing capacity at the time the qualified property is placed in
service; facilities that undergo significant renovations, as defined in
paragraph (b)(9) of this section, will no longer qualify as existing
facilities within the meaning of this paragraph (b)(5).
(6) Foreign country of concern. The term foreign country of concern
has the same meaning as provided in 15 CFR 231.102.
(7) Material expansion. The term material expansion means--
(i) With respect to an existing facility, the increase of the
semiconductor manufacturing capacity of that facility by more than five
percent during the applicable period due to the addition of a
cleanroom, production line or other physical space, or a series of such
additions; or
(ii) Any construction of a new facility for semiconductor
manufacturing.
(8) Semiconductor manufacturing capacity. The term semiconductor
manufacturing capacity means, consistent with 15 CFR 231.117, the
productive capacity of a semiconductor facility. In the case of a
semiconductor wafer production facility that includes the processes of
growing single-crystal ingots and boules, wafer slicing, wafer bonding,
etching and polishing, cleaning, epitaxial deposition, and metrology,
semiconductor manufacturing capacity is measured in wafer starts per
month. In the case of a semiconductor fabrication facility,
semiconductor manufacturing capacity is measured in wafer starts per
year. In the case of a packaging facility, semiconductor manufacturing
capacity is measured in packages per year.
(9) Significant renovations. The term significant renovations means
building new cleanroom space or adding a production line or other
physical space to an existing facility that, in the aggregate during
the applicable period, increases semiconductor manufacturing capacity
by 10 percent or more of the capacity.
(10) Significant transaction--(i) In general. As determined in
coordination with the Secretary of Commerce and the Secretary of
Defense and except as provided in paragraph (b)(10)(ii) of this
section, the term significant transaction means any of the following:
(A) An investment, whether proposed, pending, or completed,
including any capital expenditure, loan, or gift;
(B) The formation of a subsidiary, whether classified as a
corporation or partnership for Federal tax purposes;
(C) A merger, acquisition, or takeover, including--
(1) The acquisition of a new or additional ownership interest in an
entity;
(2) The acquisition of a material portion of the assets of an
entity; or
(3) A consolidation;
(D) The formation of a joint venture; or
(E) A long-term lease or concession arrangement under which a
lessee (or equivalent) makes substantially all business decisions
concerning the operation of a leased entity (or equivalent), as if it
were the owner.
(F) A transaction that involves the expansion of manufacturing
capacity for legacy semiconductors (other than with respect to an
existing facility or equipment of an applicable taxpayer for
manufacturing legacy semiconductors) if less than 85 percent of the
output of the semiconductor manufacturing facility (for example,
wafers, semiconductor devices, or packages) by value, is incorporated
into final products (that is, not an intermediate product that is used
as factory inputs for producing other goods) that are used or consumed
in the market of a foreign country of concern; or
(G) A transaction during the applicable period in which an
applicable taxpayer knowingly (within the meaning of 15 CFR 231.106)
engages in any joint research, as defined in 15 CFR 231.105, or
technology licensing effort with a foreign entity of concern that
relates to a technology or product that raises national security
concerns.
(ii) Required agreement. If a taxpayer enters into a required
agreement with the Secretary of Commerce pursuant to 15 U.S.C.
4652(a)(6)(C) and 15 CFR 231.112, then the term significant transaction
for purposes of section 48D and the section 48D regulations has the
meaning provided in the required agreement. Defined terms in the
required agreement control only for purposes of determining the meaning
of the term significant transaction. Thus, the effect of a significant
transaction is determined under section 50(a)(3) and (6) during the
applicable term defined under paragraph (b)(1) of this section.
(11) Technology licensing. The term technology licensing has the
same meaning as provided in 15 CFR 231.120.
(12) Technology or product that raises national security concerns.
The term technology or product that raises national security concerns
has the same meaning as provided in 15 CFR 231.121.
(c) Exception from the definition of applicable transaction for the
manufacturing of legacy semiconductors--(1) In general. The term
applicable transaction, as defined in section 50(a)(6)(D) and paragraph
(b)(3) of this section, does not include a transaction that primarily
involves the expansion of manufacturing capacity for legacy
semiconductors, but only to the extent not described in paragraph
(b)(10)(i)(F) of this section.
(2) Legacy semiconductor. The term legacy semiconductor has the
same meaning as provided in 15 CFR 231.107.
(d) Example: Applicable transaction credit claimed. On January 15,
2025, X Corp, a C corporation that is a calendar-year taxpayer, placed
in service Property A, qualified property with a basis of $1 million. X
Corp's qualified investment, as determined in Sec. 1.46-3(c), for the
taxable year is $1 million. X Corp's advanced manufacturing investment
credit for the taxable year is $250,000 ($1 million x 0.25) and,
[[Page 84763]]
assume that X Corp's income tax liability is $400,000. X Corp does not
determine any other credits in 2025. X claims an advanced manufacturing
investment credit of $250,000 for its 2025 taxable year. On December
15, 2026, X Corp engages in an applicable transaction, as defined in
section 50(a)(6)(D) and paragraph (b)(3) of this section and did not
cease or abandon the transaction within 45 days of a determination and
notice by the Commissioner. X Corp has not determined or claimed any
general business credits since its 2025 taxable year. The aggregate
decrease in credits allowed under section 38 for all prior years
resulting from reducing to zero any credit determined under section 46
that is attributable to the advanced manufacturing investment credit is
$250,000 ($250,000 (credit allowed)-$0 (credit that would have been
allowed)). X Corp's tax under chapter 1 is increased by $250,000 (1.0 x
$250,000) for the 2026 taxable year. Pursuant to section 48D(c), for
the 2026 taxable year, X Corp is not an eligible taxpayer and is
ineligible to claim or carryforward the advanced manufacturing
investment credit.
(e) Applicability date. This section applies to property that is
placed in service after December 31, 2022, and during a taxable year
ending on or after October 23, 2024.
Douglas W. O'Donnell,
Deputy Commissioner.
Approved: October 8, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-23857 Filed 10-22-24; 8:45 am]
BILLING CODE 4830-01-P